New manufacturing plant in Kulim

PGF Capital (PGF) has entered into a sales and purchase agreement to acquire a piece of freehold land, measuring approximately 30 acres within the Kulim East Industrial Park for a cash consideration of RM40mn or RM38psf. This land is strategically located approximately 30 minutes from PGF’s existing plant in Perai and 45 minutes from Penang Port.

According to announcement, the land will be developed in phases. Under phase 1, a new manufacturing plant will be built to increase the group’s total annual insulation production capacity by 160% or 40,000 mt, from existing 25,000mt to 65,000mt. The construction is slated to begin in early-25 with commercial operations expected to begin by 1H26. Meanwhile, phase 2 expansion, which is expected to commence operations by 1H28, will add a further 20,000mt and boost the total capacity to 85,000mt.

Timely Expansion

The expansion of capacity by more than double is crucial to deal with the overwhelming demand. PGF’s existing capacity has been fully used up to meet the buoyant sales to Australian and New Zealand housing markets to comply with the stringent green and sustainable housing policies. As such, we are positive on this land purchase as it would not only resolve issues relating to capacity shortage but the land is also big enough to cater for its future expansions.

At RM40mn or RM38psf, the purchase consideration is relatively cheap if compared to other industrial lands in Kulim East, where the average asking price is between RM48-60psf (referring to PropertyGuru and iProperty). As far as funding is concerned, PGF has a net cash of RM9.6mn as at 31 May 2024, showing ample debt headroom to finance the entire capex requirement of RM200mn for land, building, plant and machinery as well. On top of that, the conversion of warrants by the founder in June-24 also contributed to additional cash of RM10mn.

Forecast

No change to our FY25-26 profit projections. We introduce our FY27 earnings forecast of RM65.6mn with an EBIT mix of 48:52% from insulation and property divisions.

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 - 17 Sept 2024