Wednesday, 9 April 2014

Midas Holdings

Kim Eng on 4 Apr 2014

  • China’s new round of high-speed rail investment and other impending developments in the industry bode well for Midas. 
  • Our projected three-year EPS CAGR of 73% and steadfast ROE expansion will be driven by operating leverage. The earnings turnaround story, starting from FY13, looks set to continue.
  • Maintain BUY. Current low valuation of 0.9x FY14E P/BV provides a good entry point.
What’s New
Change is afoot in China’s railway industry following the government’s recent announcement of five railway construction projects worth CNY142.4b. Also brewing are a possible reform of China Railway Corp’s (CRC) funding structure, strong order win momentum for Midas’s upstream clients and better-than-expected high-speed train pricing. All this augurs well for Midas.

What’s Our View
We find the potential reform of CRC’s funding structure the most encouraging among the impending developments. CRC’s high debt level has created a bottleneck in the industry, stalling railway construction and disrupting train purchase schedules. In our view, this bottleneck could be resolved by introducing social capital into the industry. After all, the railway industry has the lowest level of marketisation compared with other local industries and we think CRC has the tools, eg, granting land use rights along the railways, to attract social capital participation.

In our view, the recent price weakness (-9.0% in the past three months) offers a good buying opportunity. In our view, Midas presents a compelling earnings turnaround story with EPS CAGR of 73% over FY14E-16E, helped by operating leverage. Maintain BUY and TP of SGD0.75, pegged to 1.5x FY14E P/BV, which conservatively placed it at the lower end of its trading range during the last high-speed rail cycle (FY08-11).

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