Key takeaways from PGF Capital’s (PGF) 2QFY25 results briefing are as follows:

• Minor hiccups in Australia;

• Doubling down on capacity;

• Delay in property launch in Tanjung Malim; and

• Budget 2025 impact is insignificant.

We cut our FY25-27 earnings projections by 16-34% after factoring in the delay in recognising a land sales gain. Maintain Buy with an unchanged target price of RM2.76/share.

Minor hiccups in Australia

PGF’s (PGF) registered a decent growth in profit of more than 5x for 1HFY25. This was due to a resilient growth in exports of insulation product, which boosted its operational efficiency. Also, the costs of production normalised after some start-up losses from warehouses in Australia last year, which led to margin recovery. Looking forward, management remains optimistic about the demand for glass wool insulation product over the long run.

However, the shortage of workers in the housing industry in Australia presages a slowdown in construction activities in the near-term, which may cripple the demand for building material. Having said that, the future demand for glass wool insulation is expected to remain resilient as Australia’s housing is extremely undersupplied. According to Reuters, Australia Prime Minister has pledged to build 1.2mn homes by 2030 to help ease cost pressures in one of the world’s most expensive housing markets.

Elsewhere, PGF will participate in the tender for the supply of insulation product to one of the mega data centres (DC) in Malaysia. We believe it has a good chance to outbid its two rivals as the mineral wool sandwich panels produced by its principal company, Centrial International (Centrial), has a proven track in DC projects such as Microsoft’s DC in Singapore, Apple Inc.’s DC in Mongolia and China, to name a few. PGF is currently undergoing applications for SIRIM and BOMBA certifications for the mineral wool sandwich panels.

Doubling down on capacity

In view of that, we laud PGF’s initiative to expand its manufacturing capacity by more than double to 60,000 tonnes (from 25,000 tonnes) to meet the resurgent demand. According to management, the construction of the new plant in Kulim East is on track for ground-breaking in Dec-24 and complete by 1Q26.

The cost of development remains at RM200mn (RM240mn including land cost) and the group has built in sufficient buffers against cost inflation and ringgit fluctuation. Note that company has already secured a bank loan of RM200mn for this new plant. With regards to the tax incentive, the management is confident and hopeful to obtain the grant by 1Q25.

Delay in property launch in Tanjung Malim

The launch of RM600mn GDV property project via PGF-Malvest JV in Tanjung Malim (Tg. Malim) would likely be delayed to FY26 as the project has yet to receive all development approvals. According to the management, the development is pending a final approval from a utility operator and the delay would consequently affect the recognition of a land sale gain in FY25. Note that the JV agreement stipulated that the sale of land and recognition of gain are conditional upon 80% booking after the project is launched. As such, we carry forward this “non-cash” gain from disposal to FY26 and FY27.

Despite the delay in property launch, we remain sanguine on the demand for residential property in Tg. Malim on the back of a rapid development in Automotive High-Tech Valley. We believe the return of President Trump after winning the election would stimulate Geely to speed up its diversification and expansion plans overseas, including AHTV in Malaysia, to minimise the impact of Trump tariff on Chinese imports.

Budget 2025 impact is insignificant

The direct impact of the hike in minimum wage to RM1,700/month next year would be marginal. According to management, there are approximately 60% of the whole 150 foreign workers who are currently earning the minimum wage of RM1,500/month. Our rough estimate shows only a 0.2% (or RM216k) increase in cost of production per annum. Assuming an average monthly pay of RM2,000 for each foreign worker next year, the impact of EPF contribution for foreign workers, if implemented (assuming 12%), would also be insignificant with a meagre 0.8% (or RM432k) increase in cost of production per annum. With regards to the new budgetary measure of 2% tax on dividend income exceeding RM100,000, the management reaffirms that it will retain the 25% dividend payout policy although the group executive chairman and group CEO will take the brunt of the dividend tax.

Forecast

We trim our FY25/26/27 earnings projections by 34/16/18% to factor in the delay in land sale gain recognition. We now assume the project to launch in FY26, which would contribute a partial gain of RM9.4mn in FY26 and the balance of RM11.6mn in FY27.

Valuation

We maintain the sum-of-parts valuation (SOP) at RM2.76/share for PGF (Figure 1) with a ESG rating of * * * as the delay in recognition of land sales gain will have a minimal impact on our RNAV computation. Maintain Buy

Source: TA Research - 8 Nov 2024