Overview

PGF Capital (PGF) is principally involved in manufacturing and selling of glass mineral wool used in building insulation. In addition, it is also in possession of a 1,311-acres leasehold land in Tanjong Malim (Tg. Malim), Perak, making PGF one of the largest landowners there. This land is expected to transform the company and place it in a different league

Investment Themes

• Glass wool is environment friendly. Glass wool is widely used in building insulation in Australia, where PGF derives 50% of its revenue from. Due to the change in the National Construction Code, which requires home and building owners to meet the energy efficiency performance requirement, the demand for insulation product has been rising steadily in the country.

• Land “banking” on Proton City AHTV. PGF’s 1,311 acres land is debt-free. It is located adjacent to Proton City in Tanjung Malim. This land has a carrying value of RM146.7mn or RM2.57psf, which is a steep discount to the current market price of RM45psf. Hypothetically, if PGF sells only the 400 acres of land earmarked for housing development at the market price, the disposal proceeds could amount to RM780mn, which is approximately 2.0 times greater than its current market capitalisation.

• Sustainable business with strong ESG awareness. PGF plays an important role in global warming and circular economy through its “Green In, Green Out” operations. Notably, PGF’s output is environment friendly as its end products contribute to building insulation. PGF is also an important agent to circular economy as 80% of the glass mineral wool produced by the company is sourced from recycled glass, which will reduce landfill pollutions.

Risk

• High operating leverage and Forex risk. The production of glass wool requires melting recycled glass at a temperature exceeding 1,400°C in an electric and gas furnace. The cost of operating a gas furnace and an electric melter accounts for 28% of cost of goods sold. Also, PGF has 40% of revenue denominated in foreign currencies while nearly 100% of COGS is in Ringgit. This imbalance would give rise to forex risk.

Recommendation

• Our SOP valuation for PGF is RM2.76/share (Figure 2). We believe our valuation has substantially priced in the foreseeable risks that Tg. Malim land will remain significantly under-developed. Our conservative valuation has also greatly priced in the marketability risk in trading of PGF share caused by its relatively low public float in the market.

Source: TA Research - 2 Jul 2024