Key Takeaways From PGF Capital (PGF) Briefing Are as Follows:

• Retain a small fraction of RM3bn GDV for future recurring income;

• New production facility either in Kulim or Banting; and

• Addressing the public spread issue.

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

Breakdown of RM3bn GDV

The property development over the 403-acres (Figure 1) land has a potential GDV of RM3bn. It comprises both residential and commercial elements at a ratio of 9 to 1. On the residential component, it will consist of 6,000 units mainly affordable housing selling at more than RM300k per unit. According to management, the company would only retain some commercial units for future recurring profit. In terms of launch, it is targeted in June-24 after getting the final approval from the state government.

New Plant Either be in Kulim or Banting

PGF has sold out its production capacity for 2024. In view of this, PGF’s board has approved a development budget of RM170mn capital expenditure for a new production facility to raise its annual capacity by additional 38,000 mt to 63,000 mt. According to management, it is currently in negotiations with landowners after shortlisting 2 parcels of lands, each in Kulim and Banting. Assuming construction works to begin in 2H24 and a construction duration of 24 months, the new plant is targeted for completion by 2HFY26.

The shortage of capacity should have made PGF a price maker now. However, management would only raise the selling price of glass wool a tad for 2024 sales to cover the rise in cost of sea freight. It prefers to maintain the favourable relationship with its Australian customers, who are already paying top dollar for PGF’s glass wool.

Addressing the Public Spread Issue

The company is considering both equity and debt financing to fund the RM170mn capex requirement. Ideally, the substantial shareholder, i.e. Fong family, could reduce its 73% stake in PGF and sell it to strategic investors or partners. The proceeds from sales of PFG share, if any, would be ploughed back into the company via conversion of irredeemable convertible preference shares (ICPS) by Fong family. This would address both the public spread issue and equity fund raising. Note that the ICPS will expire in Mar 2027. It can be converted via: 1) surrendering 9 ICPS to 1 ordinary share, or 2) conversion of 1 ICPS to 1 ordinary share by paying RM0.90.

Forecast

No change to our FY24-26 earnings projections

Valuation

We maintain the sum-of-parts valuation (SOP) at RM2.76/share for PGF. At RM2.76, the implied PE of 10.6x 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 - 6 Feb 2024