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

• In dire need of expansion;

• AHTV is taking shape gradually; and

• Disposal of shares to strategic investors.

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

Results Preview

PGF Capital (PGF) is expected to announce its 4QFY24 results this month. We expect the quarterly profit to be around RM2.0-3.0mn, taking into account the seasonally weak demand for insulation products in Australia due to slower construction activities during festive seasons. Comparing this with previous year corresponding quarter, it would be a turnaround from core loss of RM4.6mn. In addition, we expect PGF to declare a final dividend of 2.1sen/share or 25% of profit to meet its 25% dividend payout policy.

In Dire Need of Expansion

In our recent meeting with management, we understand that its newly formed 50%-owned JV has recently leased a warehouse in Sydney, measuring 3,300 sqm, to store the glass wool for distribution to local customers. Meanwhile, one of PGF’s distributors has participated in the new Western Sydney International Airport project (appendix A), which would require an estimated 300mt of glass wool for insulation purpose. The distributor had already supplied 20% of the requirement last year and will supply the rest from now on until end-2025.

For production expansion, the group is now toying with the idea of converting the existing warehouse next to the manufacturing plant in Seberang Perai to a new manufacturing facility and lease/acquire a warehouse in another location. Besides that, management is still actively searching for a land in Banting or Kulim for expansion purpose. According to management, the latter would require a total capital expenditure of estimated RM200mn, which is twice as much as converting the existing warehouse. Whichever the case maybe, we opine that the expansion plan should be expedited as the implementation of Penang LRT project has recently received the greenlight from the government. It would be a big opportunity cost if PGF fails to supply the insulation products to the 20 LRT stations on its home turf simply because of production constraints.

AHTV Is Taking Shape Gradually

From our channel check, the implementation of the Automotive High Tech Valley (AHTV) to transform Tanjung Malim (Tg. Malim) into an automotive hub is progressing. Geely recently unveiled its plan to build a university, which we believe is for its future needs of human capital and R&D. We also understand that there are Chinese auto part makers and industrial park developers intend to join the supply chain ecosystem within the AHTV to support Proton’s future production. We believe AHTV would begin to take shape once the land availability issue is resolved. The full development of AHTV will bode well for PGF given its significant 1,311-acre landbank just next to the AHTV.

Speaking of PGF’s landbank in Tg Malim, PGF and its JV partner, Malvest Properties, is waiting for an approval from the authorities for the initial launch of the 45-acres JV development (Phase 1A), comprising serviced apartments, shoplots, 1.5-storey terrace houses with an estimated GDV of RM135.9mn. According to JV agreement, the structure of the JV is tantamount to a “disposal transaction”, whereby PGF would recognise a disposal gain upon achieving a booking rate of 80%. Figure 1 below is the web page of Malvest with regards to the Tg. Malim development.

Disposal of Shares to Strategic Investors

Recently, it was announced that Mr. Fong (founder) disposed 10.82mn shares at RM1.70/share. There were off market transactions, according to Bursa announcement, which reduced Mr. Fong’s stake in PGF to 45.1% from 51.7%. We expect some of the disposal proceeds will be ploughed back to PGF later via conversion of preference shares by Mr. Fong and his family. All in all, we are positive as the share sales would bring in new strategic investors to the group, as well as additional capital (via preference share conversion) to fund the capacity expansion.

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 - 9 Apr 2024