While Malaysia’s technology sector is structurally exposed to energy cost volatility, its earnings impact is partially mitigated by cost pass-through mechanisms, Kenanga Research said in its recent report.

“Broadly across the Malaysian tech sector, fluctuations in key input costs such as electricity are typically passed through to customers with a lag of about one to two quarters, cushioning longer-term margin erosion,

“Our engagement with management indicates that, given the industry’s reliance on short-cycle purchase orders (rather than long-term fixed contracts), pricing for new orders is regularly adjusted to reflect prevailing cost dynamics, including energy prices,” the research house said.

That said, it noted this lag effect implies that companies could still face temporary margin compression in the near term, particularly during periods of sharp energy price spikes.

“As such, while we do not see energy cost inflation as a structural threat to profitability, it remains a timing-driven earnings risk, with near-term margins more vulnerable for players with higher energy intensity or limited hedging mechanisms,

“Over the medium term, companies with stronger pricing discipline, higher renewable adoption, and better energy management are likely to outperform on margin resilience,” said Kenanga.

The research house’s review of company-level latest annual report disclosures indicates that grid electricity remains the primary energy source for Malaysian technology players, with data showing a heavy skew toward electricity consumption across most names.

“Even among smaller players, electricity remains the core energy input, with only limited use of alternative fuels,

“This consistent pattern across companies highlights a structurally grid-centric energy model, with diesel, petrol, and natural gas used primarily as supplementary or backup sources rather than core inputs,” it said.

While fuel usage is not widespread across the sector, Kenanga opined that it is meaningful for select players, introducing pockets of higher sensitivity to oil-linked price volatility.

It noted many peers disclose minimal or no fuel usage, reinforcing the sector’s overall reliance on electricity.

“However, this does not eliminate risk – electricity tariffs themselves are indirectly linked to broader energy markets, meaning that any spike in global oil and gas prices (e.g. from US–Iran geopolitical tensions) is likely to cascade into higher operating costs across the board,

“As such, despite limited direct fuel dependence for most players, the sector remains structurally exposed to energy price shocks
via both direct and indirect channels,” said the research house.

Meanwhile, solar adoption is steadily gaining traction in the Malaysian tech sector, with a growing number of hardware companies beginning their solar initiatives.

Notably, all the companies within our sample have either already embarked on their solar journey or have outlined plans to do so.

However, despite this progress, Kenanga sees solar energy remains in the early stages of integration and has not yet reached a transformative level in terms of the overall energy mix.

“Based on the updated disclosures, only a small number of companies have achieved meaningful renewable contribution,

“By contrast, most other adopters still appear to be contributing less than 1 percent of total energy needs from solar,” it said.

This suggests that, although solar installations are becoming more common across the sector, actual renewable contribution remains relatively small for most companies, with grid electricity still the dominant energy source, it added.

On average, it said Scope 2 emissions make up more than 90 percent of total emissions in their sample.

This highlights solar’s potential to further reduce Scope 2 emissions, as increasing solar adoption can lower reliance
on grid electricity and drive meaningful carbon footprint reductions.

Kenanga also highlighted that solar adoption is becoming more widespread at the operational level, with installations now disclosed across a broader set of companies.

Expansion efforts remain ongoing, as seen in some companies additional capital expenditure allocation.

“While this points to a strengthening pipeline, current renewable penetration remains below 20 percent for nearly all companies indicating that solar is still insufficient to fully offset near-term energy shocks or meaningfully shield margins in the immediate term,

“In our view, this supports a medium-term positive readthrough, but not yet a near-term earnings hedge,” said the research house.

According to the report, the rationale for solar investment is evolving beyond sustainability disclosures toward a more tangible cost hedge and energy security strategy.

For semiconductor and electronics manufacturers, on-site solar generation can help mitigate exposure to rising electricity tariffs, improve visibility over operating costs, and partially reduce dependence on external grid supply.

This is particularly relevant in an environment of geopolitical driven energy volatility, where energy security is becoming more financially material.

This shift is increasingly critical as global clients increasingly favor suppliers with lower-carbon operating models to mitigate their own Scope 3 emissions and avoid potential EU-CBAM penalties, said Kenanga.

“Hence, solar is emerging as a strategic operational lever, supporting cost control, supply chain credibility, and long-term resilience, even if its current earnings impact remains modest for most players,” it added.

Asia’s softer grid demand amid renewables push for energy security – BMI