PGF: Core Earnings Show Resilience Amidst Pressures, BUY Rating Maintained

The company reported a core net profit of RM18 million for the nine months ended 3QFY26, falling below Mercury Securities’ internal estimates but aligning with market consensus. Despite a robust 7.2% year-on-year increase in topline revenue, core net profit for the period saw a 10.1% year-on-year decline, largely due to a higher effective tax rate. However, on a quarter-on-quarter basis, the company demonstrated resilience, with the bottom line elevating by a notable 9.5% despite a 2.8% decline in topline.

Performance Review

Year-on-year revenue growth was primarily driven by steady demand within the Insulation segment, which registered a 7.8% increase, reaching RM129.7 million. Profitability, however, was impacted by several factors, including higher net funding costs, an approximate RM3 million mark-to-market unrealized loss on Cross Currency Swap (CCS) facilities, and a RM1.2 million foreign exchange loss due to the weakening of the export currency. The effective tax rate also increased significantly to 33% from 26% in the previous corresponding period, further exerting pressure on core net profit.

Quarter-on-quarter performance showed a rebound in profitability. Despite a slight softening of demand and a weakening export currency from Oceania, which led to a decrease in insulation segment revenue, the company’s net profit rose by 9.5%. This improvement was primarily attributable to a 3-percentage point increase in EBITDA margin, stemming from a similar decline in OPEX margin. Additionally, lower mark-to-market unrealized losses, reduced net funding costs, and a more favorable effective tax rate contributed to the bottom-line elevation.

Challenges and Risks

Key challenges highlighted in the report included lower-than-expected production output from the insulation segment and a lack of revenue contribution from the property division during 9MFY26. The company also faces ongoing risks from currency volatility and anticipates a seasonally weaker performance in 4QFY26.

Future Outlook and Investment Thesis

Mercury Securities maintains an optimistic medium-term earnings outlook, despite the near-term pressures. This positive sentiment is reinforced by a renewed demand for glass mineral wool insulation across key export markets, supported by favorable regulatory tailwinds such as Australia’s National Construction Code (NCC 2022) and Malaysia’s Energy Efficiency and Conservation Bill (EECB). Earnings momentum is projected to resume from FY27 onwards, driven by the commissioning of additional production capacity and improved operating leverage. Significant contributions from the property development segment are also anticipated in FY27, with the core insulation business expected to continue anchoring earnings visibility.

The investment bank has reiterated its BUY rating for the stock, maintaining an unchanged target price of RM2.43 based on a Sum-of-the-Parts (SOP) valuation. This valuation incorporates a 10x FY27E P/E for the core insulation manufacturing business, aligning with the construction materials sector average, and applies a 50% discount to the RNAV for the property development segment, acknowledging execution risks and the absence of near-term earnings contribution. The favorable risk-reward profile is supported by strong earning visibility, timely capacity expansion, and the attractive asset play from its strategically located landbank.