Key takeaways from PGF Capital’s (PGF) briefing are as follows:

• More than 70% of 1QFY25 revenue came from Australia;

• New manufacturing plant in Kulim; and

• Tg. Malim remains the wildcard.

No change to our FY24-26 earnings projections. Maintain Buy with an unchanged target price of RM2.76/share.

>70% of 1QFY25 Revenue Came From Australia

PGF Capital’s (PGF) 1QFY25 results performance was encouraging with a 60% YoY growth in core profit to RM6.4mn supported by revenue growth of 42.2% with relatively stable margins. This was a testament to the robust demand for insulation products in Australia. According to management, more than 70% of the total revenue was derived from the Australian market in 1QFY25 and the trend would likely persist going forward, thanks to the change in building code that has tightened up the requirements for building insulation.

Besides that, the management is confident of securing orders from LRT and Airport expansion projects in Penang. Although these one-off orders would not be big in terms of contract value, it is big enough to cause a constraint on its existing capacity of 25,000mt, which has already been maxed out in 1QFY25.

New Manufacturing Plant in Kulim

PGF has narrowed its land purchase consideration to Kulim, which is approximately 30 minutes away from its existing plant in Seberang Perai. The construction would begin short after the land purchase, which is targeted for completion in end-25/early-26. As far as capex is concerned, the group has allocated approximately RM200mn for this expansion, which would increase its manufacturing capacity to 65,000mt per annum.

With regards to the recently signed 5-years distribution right for mineral wool sandwich panel from Centria International, a renowned global leader in advanced building materials and solutions, we understand from the management that the distribution right is exclusive in Malaysia and nonexclusive in Australia, New Zealand and Singapore. Management is hopeful to secure its first order from data centre (DC) next year with potential value of RM10mn per unit of DC. Looking forward, PGF intends to set up a JV with Centria International to produce sandwich panel at the new Kulim plant, using PGF’s glass wool as raw material.

Tanjung Malim Remains the Wildcard

PGF, via its JV company, has yet to obtain the development approval but management is confident of securing it for the first phase of housing development in Tanjung Malim (Tg. Malim) soon. This first launch is important to gauge housing demand, in particular for high-rise serviced apartments that are lacking in the city. As the first phase of development carries a GDV of only RM600mn (out of RM3.0bn total GDV), achieving a take-up rate of less than 50% within the first 6-months of launch is unacceptable and it simply means that the demand is not as good as anticipated.

Note that in our forecast, we expect the company to report a land sales gain of RM21mn in FY25, emanating from the JV agreement with Malvest where PGF would recognise the land disposal, provided that the development achieves a take-up rate of 80%. Thereafter, we expect the group to spearhead the housing development in Tg. Malim with property sales of RM180mn and RM300mn in FY26 and FY27 respectively with a lucrative EBIT margin of 40%.

Forecast

No change to our FY25-27 profit projections.

Valuation

We maintain the sum-of-parts valuation (SOP) at RM2.76/share for PGF (Figure 1), which has a ESG rating of «««. At RM2.76, the implied PE of 12x CY25 EPS is considered fair for an investment in a carbon-neutral company, which will stand to gain from robust demand and regulatory support in future. Maintain Buy

Source: TA Research - 8 Aug 2024