• BUY, new TP of MYR3.97 from MYR4.39, 53% upside with 3% FY25 (Mar) yield. The US restricting artificial intelligence (AI) chip exports to countries like Malaysia should have a limited impact on IJM Corp. Data centre (DC) jobs make up 8% of its Malaysia orderbook (as of end-Sep 2024), but it likely has no exposure to DC providers from Tier-1 countries. Still, we lower the target P/E ascribed to IJM's construction arm to 20x from 25x to reflect the less diverse job pipeline vs peers like Gamuda (GAM MK, BUY, TP: MYR5.83) which is skewed towards some industrial and a few infrastructure jobs.
• DC developers in Tier-2 countries may obtain a National Validated End User (NVEU) status to deploy a significant amount of graphic processing units (GPUs) in their home countries, whereby the allowance to increase GPUs brought is done in phases until the total allocation rises up to 320k H100-equivalent GPUs. This may apply to Telekom Malaysia (T MK, BUY, TP: MYR4), which has DCs being constructed by Gadang (GADG MK, NR) and IJM. IJM is also building a DC in Gelang Patah, Johor worth MYR254m (based on its 50% effective share of a JV with Woh Hup Malaysia) for an international DC developer. As Woh Hup Malaysia's parent is headquartered in Singapore, we do not rule out that the international DC developer could be from Singapore, too - which qualifies it for NVEU status vs Universal VEU status which has a higher allowance to bring in chips to some Tier-2 countries.
• IJM's smaller scale of DC exposure may be positive on the surface, in light of the latest restriction on AI chips. Still, if many DC developers are able to navigate the latest AI chip restrictions by obtaining NVEUs or Universal VEUs (for Tier-1 countries), IJM may lose out on the potential growth of the DC market. As such, it may need to replenish more industrial building jobs (factories and warehouses) that are smaller in size and have lower margins vs DC jobs in general. Recall that soon-to-known outcomes of industrial related tenders (including DCs) are likely not contracts exceeding MYR1bn.
• No changes to our earnings estimates but we cut our target P/E (mentioned above) to arrive at a TP of MYR3.97 (from MYR4.39), which bakes in an ESG premium of 2%. Rerating catalysts for the stock would be clinching larger jobs more frequently, be those non-DC industrial or infrastructure jobs, as the Ministry of Works estimates construction spending at MYR200bn for CY25.
• The stock is trading at 17x FY26F P/E, which is close to the 16x P/E recorded during the 2017 construction upcycle. This is unjustified, as the job mix back then revolved more around roads and rail infrastructure compared to present day, when the group is making effort to have a regional presence in Indonesia's new capital, Nusantara, on top of its commendable footprint in building warehouses and factories in Penang and Selangor.
• Key risks: Failure to diversify job portfolio further as DC jobs on hand are mostly related to providers from Tier-2 countries.

Source: RHB Research - 20 Jan 2025