Midas Holdings

OCBC on 9 Jul 2012

We lower our FY12 and FY13 PATMI estimates for Midas Holdings (Midas) by 14.9% and 6.8% respectively, on lower margin assumptions. We expect Midas to report a set of lackadaisical 2Q12 results (PATMI: -58% YoY). But improvement in 2H12 on a YoY basis remains a possibility, due largely to a low-base effect. Midas’ 32.5%-owned JV company NPRT recently clinched a RMB860m metro contract, thus boosting its order book to ~RMB7.4b, according to our estimates. Notwithstanding its strong order book, contribution to Midas’ earnings has been lumpy. In addition, high-speed railway contracts remain an integral element to Midas’ recovery, but there is still an impasse on this front currently. We cut our fair value estimate from S$0.33 to S$0.30 (11x blended FY12/13F EPS) on account of our reduced projections. Maintain HOLD. We would turn buyers at S$0.28 or lower.

Lowering our estimates; expect 2Q12 to remain lacklustre
We review our forecasts on Midas Holdings (Midas) prior to its upcoming 2Q12 results, and opine that cost pressures faced by the group could be higher than previously estimated. We thus lower our PATMI estimates for FY12 and FY13 by 14.9% and 6.8% respectively, on lower margin assumptions. We expect Midas to report a set of lackadaisical 2Q12 results (PATMI: -58% YoY). However, 2H12 could possibly show an improvement on a YoY basis, due largely to a low-base effect as woes surrounding the Chinese Minister of Railways’ corruption scandal and high-speed train crash manifested in Midas’ weak 2H11 performance.

NPRT metro contract win a positive, but awaiting HSR contracts
Midas’ 32.5%-owned JV company, Nanjing SR Puzhen Rail Transport (NPRT) recently clinched a RMB860m metro contract for a Dongguan project. We estimate that this would boost NPRT’s order book to ~RMB7.4b. Delivery is scheduled from 2013 to 2015. The possible contract flow-through for aluminium extrusion profiles to Midas could range from RMB25-34m, based on our estimates. Despite NPRT’s strong order book, its contribution to Midas’ earnings has been lumpy. We had already previously factored in a higher share of profits from NPRT in FY12 versus FY11. Meanwhile, high-speed railway (HSR) contracts remain an integral element to Midas’ recovery, but there is still an impasse on this front currently. We believe that the resumption of high-speed passenger train car orders by China’s Ministry of Railways could occur in late 2012 or 1Q13.

Maintain HOLD
We believe that Midas’ fundamentals in the near-term remain weak. Management would actively seek to secure new metro train orders in the coming months to assuage the current dearth of HSR contracts, which is not within Midas’ control. We lower our fair value estimate from S$0.33 to S$0.30 (11x blended FY12/13F EPS) on account of our reduced projections, but maintain our HOLD rating. In our view, a more favourable entry point would be around S$0.28 or lower.