Australia’s AI moment: Data centres spark small cap opportunities

Australia’s AI moment is arriving – and the data centre build-out is the tell. Pendal Smaller Companies Fund portfolio manager PATRICK TEODOROWSKI outlines what is driving the surge and where the opportunities are emerging

• Data centre builds surge in Australia
• Small caps, copper and uranium stand out
• Find out about the Pendal Smaller Companies Fund

THE boost in growth and investment from the large hyperscalers in the US has been evident for some time, but in just the past couple of weeks, two data centre providers alone have announced 50 per cent growth in Australian data centre capacity.

NextDC (ASX:NXT) announced a 250-megawatt contract, with a planned capex spend of $4 billion in 2027, and CDC Data Centres secured Australia’s largest ever data centre contract – a 555-megawatt deal, also with a planned $4 billion capex spend in 2027.

Morgan Stanley estimates around $8-10 billion in data centre capex will be spent out to the end of the decade, but Pendal Smaller Companies Fund portfolio manager Patrick Teodorowski believes that the actual amount could be materially higher.

“We think they’ve massively underestimated the amount of spend that’s happening,” Teodorowski says.

Pendal research estimates that up to $100 billion in data centre capex will be rolled out between 2026 and 2030.

“If you average that out, it’s $25 billion per annum that needs to be spent for them to meet those targets,” explains Teodorowski. 

The Australian data centre market is tipped to reach 3,700 megawatts by 2030.

“The surge in growth and investment from the large hyperscalers out of the US is going to go from about a quarter of a trillion dollars a year to over a trillion dollars, and it feels like finally Australia is going to join the party,” says Teodorowski.

“This is something you have to pay attention to. This is going to throw up a lot of investment opportunity.”

The biggest components of a data centre build are the electrical and cooling.

“Sixty to 80 per cent of the site capital expenditure is actually on electrification and cooling, and we think we’ve found some interesting opportunities that will benefit from that,” says Teodorowski.

Where small caps can plug into the build-out

One of those opportunities is commercial construction company Shape (ASX:SHA), which provides fit-outs, remedials and new build solutions.

Historically Shape had a large presence in the office space, but the company has now won a number of data centre fit-out contracts.

For one of the company’s builds, Shape subcontracted Southern Cross Electrical (ASX:SXE).

“Southern Cross Electrical does about $150 million of revenue per annum. The company is seeing an immediate opportunity pipeline of up to a billion dollars,” notes Teodorowski.

“So today it’s about 15 to 20 per cent of their business, but we can see that growing significantly and being the primary driver for their growth over the next three years.”

Another small cap catching the tailwinds of the AI capex explosion is NRW Holdings (ASX:NWH) thanks to its acquisition of electrical and mechanical contractor Fredon about a year ago.

“About a third of their business is within data centres, and they’ve recently made some announcements. They’re building data centres for the Australian Defence Force at a number of sites across Australia, and they also build for the private sector as well,” says Teodorowski.

Pendal Smaller Companies Fund holds a position in SHA, SXE and NWH.  

Copper and uranium in focus

The rapid rise of data centres will, in turn, also significantly increase power demand.

Some analysts estimate power demand across the US will double from 6 per cent to 12 per cent over the next five years.

Teodorowski sees similar growth in Australia. Alongside that is the necessary network to support that surge in power demand. That’s where copper becomes a big part of the story.

Copper demand is forecast to grow more than 50 per cent over the next 10 to 15 years at the same time production is heading in the opposite direction.

“Growing copper production has been something that’s been very troublesome over the last decade,” explains Teodorowski.

“This year, I think the forecast is for declining copper production, and the number of large-scale discoveries has been in decline for decades. So we think it’s a very good setup for that commodity.”

This means producers like Capstone Copper (ASX:CSC) and Develop Global (ASX:DVP), and small caps with high-grade projects of significance like Firefly Metals (ASX:FFM), will likely be among the beneficiaries of this thematic.

The push for cleaner baseload power is also driving an increase in commodities like uranium, particularly across the US where several major tech companies are sourcing clean energy to power their operations.

Microsoft agreed to spend US$1.6 billion for a 20-year supply of power from the restarted Three Mile Island nuclear power facility. Meta, meanwhile, inked a 20-year power deal with Constellation for its data centres, and Amazon has agreed to buy up to 1,920 megawatts of nuclear power from Talen.

This is set to benefit companies like Paladin Energy (ASX:PDN) – the largest ASX-listed uranium producer, Nexgen (ASX:NXG), which owns the largest undeveloped global uranium deposit, and emerging producer Bannerman Energy (ASX:BNM).   

Pendal Smaller Companies Fund holds a position in CSC, DVP, FFM, PDN, NXG and BNM.

Find out about

Pendal Smaller Companies Fund

Patrick Teodorowski & Lewis Edgley,
Portfolio Managers

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