My recent visit to PGF Capital’s (PGF) 1,130-acres land in Tanjung Malim (Tg. Malim) was full of adventure. Getting into a Toyota 4x4 Hilux, I gained another off-roading experience when the vehicle started climbing 450m above sea level to the hilltop, for a bird’s eye view on the whole development of Tg. Malim, especially Proton City. It was a good learning curve after all which boosted my confidence in PGF’s land in Tg. Malim. I reiterate a Buy recommendation on PGF Capital (PGF) with an unchanged target price of RM2.76/share.

Safety Always Comes First

The first question to management when arrived at the hilltop is about the safety of the hill where the company has planted 10k durian trees. According to management, minor landslides and soil erosions happened in the past, which prompted the company to carry out a proper land treatment. After a few engagements with consultants, the company has put in place a drainage system to divert rainwater and debris pathway. Besides that, I observed that the hill is covered by thick grass and sedges to stabilise the soil. Last but not least, the company has installed water tanks on the top of the hill, instead of pond, for irrigation purpose, which will reduce the risk of landslides further.

Housing Opportunity Aplenty

In figure 3 below, we can clearly see that Proton City is surrounded by thick woods, which my half-glass-full intuition told me there are plenty of opportunities for housing development. This is especially true as we understand that Proton’s workers are mostly staying in Rawang or Slim River and commuting to Proton City by train. This is due to the lack of housing supply in the city, especially affordable housings to cater to their needs.

DRB-Hicom has been one of a very few active developers in Tg. Malim. However, given the prime locations, which are just stone-throw away from Proton City, the company is building mainly mid-market properties, which could provide better margins. As such, I can see billboards (Figure 1) that are standing at the roadside, reminding the prospects about the latest launch of single-storey terrace house by DRB-Hicom Glenmarie. To check out this latest launch, we made a phone call to the sales office and noticed that Phase 18A-2 26’ x 75’ Iriz superlink single storey house will cost RM429,000/unit before discount. This works out to RM415 psf for 1,032sf of built-up area.

Comparing this with PGF-Malvest’s upcoming Phase 1A development (Figure 2), comprising serviced apartments, shoplots, and 1.5-storey terrace houses, we gather from the management the total GDV of estimated RM135.9mn for Phase 1A is based on selling prices of RM300psf for the serviced apartments and RM380psf for the terrace houses. In other words, PGF-Malvest’s launch would likely have a slight pricing advantage over DRB-Hicom, in our opinion.

All in all, we believe the demand for property in Tg. Malim hinges on the success of Automotive High Tech Valley (AHTV), which would transform Tg. Malim into an automotive hub. As such, we are keeping a close eye on China’s premier Li Qiang, who will visit Malaysia this week to commemorate the 50 years of diplomatic ties between both nations. We believe the premier would follow up on Geely’s US$10bn investment in Tg. Malim and other related issues that include Proton’s first EV which will be co-developed with Geely. We expect the US$10bn investment in AHTV to spur housing demand, which would bode well for PGF.

Conversion of ICPS

Separately, PGF announced that the founder and controlling shareholder, Mr. Fong Wah Kai, has recently converted a portion (app. 16.9mn) of his irredeemable convertible preference shares (ICPS) to ordinary shares of PGF. This would bring about additional RM15.2mn capital to PGF. According to management, the proceeds from the ICPS conversion will be used to partfinance PGF’s new manufacturing facility, where the company is on the lookout for land. Overall, we are positive as the capital injection serves as a sign of confidence in the founder and PGF’s future profitability.

Forecast

No change to our FY5-26 profit projections. However, we cut FY25-26 EPS and DPS by 9.7% after factoring in the increased share base following the conversion of ICPS.

Valuation

We maintain the sum-of-parts valuation (SOP) at RM2.76/share for PGF. At RM2.76, the implied PE of 11.8x 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 - 18 Jun 2024