Midas Holdings

OCBC on 11 Apr

In our opinion, Midas Holdings (Midas) could report a lacklustre set of results during the upcoming 1Q12 reporting season, given the challenging conditions still present in China’s railway sector. While near term uncertainties remain, there are once again positive signals from the Chinese government on the longer-term sustainability of China’s railway sector. We lower our FY12 and FY13 PATMI projections by 4.7% and 2.5%, respectively, on higher financial costs and operating expenses assumptions. Consequently, our fair value estimate declines from S$0.39 to S$0.375, still based on 11x FY12F EPS. Maintain HOLD.

MOR holds crux to industry turnaround
We believe that Midas Holdings (Midas) could report a lacklustre set of results during the upcoming 1Q12 reporting season, given the challenging conditions still present in China’s railway sector. China’s Ministry of Railways (MOR) has suspended the procurement of high-speed trains since the Wenzhou accident in July 2011. The supply of aluminium alloy extrusion products for the manufacture of high-speed trains forms an integral part of Midas’ operations. Thus we believe that MOR holds the key to a turnaround in the industry and Midas’ fortunes.

Near term outlook still hazy, but long term prospects intact
During a recent State Council meeting, Chinese Premier Wen Jiabao highlighted the importance of developing the nation’s transportation infrastructure given increasing industrialisation and urbanisation. This includes a focus on China’s high-speed rail network, with plans to complete the construction of major railway projects in 2012. We view this commitment by the Chinese government as a strong positive signal for the longer-term viability of the railway sector. Nevertheless, near term outlook remains uncertain, in our opinion. We estimate that Midas’ current order book of ~RMB800m could sustain the group’s operations for approximately another three quarters (including 1Q12), but subsequently Midas would have to replenish its order book with new contract wins. While the timing of new high-speed rail contract tenders by MOR is not within the control of Midas, we believe that management would seek to mitigate this by actively sourcing for new metro contracts, both in China and overseas.

Maintain HOLD
We see the need to lower our FY12 and FY13 PATMI projections by 4.7% and 2.5%, respectively, on higher financial costs and operating expenses assumptions. Consequently, our fair value estimate declines from S$0.39 to S$0.375, still based on 11x FY12F EPS. Maintain HOLD. Re-rating catalysts include the resumption of high-speed rail contract tenders by MOR and better-than-expected financial performance.