Analysis and Outlook

Improved order book replenishment visibility

We are turning more upbeat on HEG’s prospects, underpinned by strong pipelines of data centre (DC) projects and improved visibility on award timelines heading into 2H25. The RM675m tender book is set to expand further as tender activity gains momentum. DC remains a key focus, accounting for 80% of the current tenders, with the remainder spread across semiconductors and medical devices. HEG’s foray into the DC segment began with a RM3m fit-out job recently awarded by a US-based hyperscaler, which we view as a promising start, to help build its credentials and capture larger DC opportunities ahead. The outlook for the medical segment appears encouraging, backed by healthy factory expansion plans slated for 2H25. HEG’s experience working with a US-based medical customer with presence in Batu Kawan, Penang, improves its chances of securing more projects in this fast-growing segment, in our view.

Muted 2Q25 earnings; better prospects ahead

We revise our 2025-27E earnings forecasts by -1%/-3%/+1% mainly to account for the timing delays in new contract awards. While the upcoming 2Q25 results are expected to remain soft with core net profit likely to be steady QoQ at RM3m, we encourage investors to look beyond near-term softness. We anticipate a meaningful earnings recovery in 2026E (+34% YoY) as new project rollouts gather pace.

Maintain BUY with a higher TP of RM0.51

HEG is currently trading at 10x 2026E PER, at a discount to the sector average of 14x. Given the improved order book replenishment visibility, we see room for discount to narrow further. We raise our TP to RM0.51 (from RM0.45), based on an ascribed higher target 14x PE multiple (from 12x) on 2026E EPS. Maintain BUY. Key risks include slower-than-expected order book replenishment, unforeseen project delays, and pressure on project margins due to cost.

Key Financials

Sources: Company, Bloomberg, Phillip Research forecasts

Sector and Market Outlook

Better clarity from semiconductor clients

While Malaysia’s semiconductor exports are currently exempt from tariffs, uncertainty over the final decision by the US remains an overhang on the sector. That said, we take comfort that several of HEG’s existing semiconductor multinational corporation (MNC) clients are ramping up their production activities, with one client planning for expansion in 2H25 to cater to stronger end-market demand. HEG expects an increase in semiconductor-related tenders in 3Q25, supported by these expansion plans.

Riding on the robust medical devices industry

According to MIDA, Malaysia’s medical devices market is projected to grow at a CAGR of 8.5% to US$4.5bn over 2023-2028, potentially accounting for c.30% of Southeast Asia’s total market. Malaysia has attracted 10 of the world’s leading medical device manufacturers, which have established high-value-added production facilities. Notably, Dexcom has recently launched its first manufacturing facility outside the US in Batu Kawan Industrial Park, Penang, and based on our channel checks, is planning a further expansion adjacent to its existing site. Backed by a strong execution track record with established US clients, we believe the group is well-positioned to secure additional projects in this high-growth sector.

Overall DC contract flows are picking up momentum

Malaysia’s DC segment recorded strong momentum in 2024, with a cumulative contract value of RM7.9 bn. The notion of a slowdown in Malaysia’s DC market in 1H25 may be overstated. While sentiment remained cautious due to lingering macroeconomic and policy uncertainty, the segment registered RM4.5bn in new contract wins, representing 57% of the 2024 full-year value. Recent contract flow suggests that ground activity is picking up again, with several agreements reportedly tied to Google, signalling continued commitment to Malaysia expansion. We believe this sets a positive precedent for further project rollouts by other major DC operators in 2H25 and opens up additional opportunities for HEG.

Table 1: DC contracts award in YTD25

Source: Various, Phillip Research

From little acorns grow mighty oaks

We gather that HEG has been awarded a small RM3m DC hall fit-out job for a US-based hyperscaler. While modest in size relative to its overall order book, the project serves as a critical reference project, enabling HEG to demonstrate its capabilities and establish its track record.

Earnings outlook

Semiconductor jobs drove its peak annual replenishment.

HEG achieved its highest-ever order book replenishment in 2022, reaching RM370m (+168% YoY), driven by semiconductor-related projects. This included a sizable RM245m contract from its key semiconductor customer A, for the installation of MV, LV, and ELV power distribution systems at its manufacturing facility in Kulim. In 2023, contract replenishments slowed significantly to RM46m as the group focused on executing its high backlog from the previous year. Following its listing in 2024, HEG secured RM105m in new orders, primarily from the semiconductor sector, while actively making inroads into the DC segment; however, project delays have tempered progress amid a more cautious macroeconomic environment. Looking ahead, we have pencilled in an order book replenishment assumption of RM120-250m over 2025-27E, premised on robust replenishment prospects across the semiconductor, medical, and DC industries, backed by a sizeable RM675m tender book.

Table 2: Contract replenishments trend (RMm)

Source: Company, Phillip Research forecasts

Higher-margin projects to cushion the impact of softer revenue in 2025E.

We have revised our 2025E earnings lower by 1% as slower revenue recognition from delayed project awards is partially offset by better-than-expected margins from a higher mix of electrical equipment hook-up and retrofitting work. Our 12% revenue downgrade reflects a more conservative order book replenishment of RM120m (from RM200m) as clients remain cautious amid uncertainty over President Trump’s tariff policies.

Valuation and recommendation

Stock price has corrected by 33% YTD.

HEG’s share price has undergone a de-rating over the past 6 months due to slower order book replenishment and negative development stemming from Al chip export curbs. Its current PER multiple trades slightly above -2SD below its mean PER and at a discount to the sector average of 14x. We believe much of the negative news has been priced in, with the current valuation representing an attractive opportunity for investors seeking exposure to structural multi-year DC growth themes.

Maintain BUY with a higher TP of RM0.51.

Backed by improved visibility on order book replenishment, we raise our target PE multiple to 14x (from 12x) and derive a higher TP of RM0.51 (from RM0.45). Maintain BUY. Key risks include slower-than-expected order book replenishment, unforeseen project delays, and pressure on project margins due to cost.

Table 10: MEP peer comparison

Source: Bloomberg, Phillip Research forecasts *calendarized data

FINANCIALS

Source: Company, Phillip Research forecasts