Results preview

PGF Capital (PGF) is expected to release its 2QFY25 financial results end of this month. We expect the quarterly profit to come in the range between RM6mn-8mn for 2QFY25, boosting the cumulative 1HFY25 profit to RM12.4mn-14.4mn or 30-34% of our full-year estimate, which comprises a lumpy land sales gain of RM21mn.

The significant YoY recovery in 2QFY25 results performance from a core loss of RM1.1mn in 2QFY24 would be bolstered by revenue growth of +30% YoY underpinned by robust demand from contractors in Australia, as well as normalisation of margins as the plant has already resumed full operations after shutdown maintenance of one of the production lines in 2QFY24.

Doubling Down on Capacity

Looking forward, the demand for building material is expected to remain strong in Australia as the government has strived to increase housing supply in a bid to address the shortage crisis, which has caused property price spiralling upwards. In view of this, PGF has embarked on a RM245mn expansion plan in its new Kulim plant (see report dated 17 September 2024), doubling down on its capacity to meet the resurgent demand. In our recent meeting with management, we understand that the cost of production of glass wool insulation products in this new plant in Kulim East would not necessarily be higher than the existing plant during the initial phase as the tax incentive in the ensuing paragraph could be sufficient to offset the start-up costs.

According to management, PGF has submitted its application for the Northern Corridor Economic Region (NCER) tax incentive. If successful, the company will enjoy 100% income tax exemption up to 15 years; 100% investment tax allowance up to 10 years; import duty exemption; and 50% reduction on transfer or lease of land for building a manufacturing plant in Kedah (Figure 2). On top of that, the strengthening of ringgit against US dollar would also help reducing capital outlays for the new Kulim plant. Note that the purchase of machinery, which would be mostly paid in US dollar, accounts for 38% of the total development costs for the Kulim plant.

Forecast

No change to our FY25-27 earnings projections.

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 - 10 Oct 2024