Midas Holdings: Growth strategy on track

By Lee Wen Ching
Mon, 1 Mar 2010, 08:58:51 SGT

Midas Holdings’ (Midas) FY09 results were in line with expectations. Revenue grew 8.6% to S$150.0m, gross profit gained 20.0% to S$56.6m, and net profit improved by 14.9% to S$37.5m. Gross profit margin expanded by 3.5ppt to 37.7% thanks to generally lower raw material costs during the year. This led to a 1.3ppt improvement in net profit margin to 25.0%. The group’s order book now stands at RMB1.3b, while its associate Nanjing SR Puzhen Rail Transport is sitting on a RMB6b order book. Midas’ growth strategy remains intact. Its capacity expansion amid buoyant industry demand should drive earnings growth momentum in the medium term. We continue to like Midas for its earnings visibility and strong positioning amid a rapidly growing industry. Maintain BUY with S$1.30 fair value estimate. A final dividend of 0.25 S cents has been declared.

FY09 earnings in line with expectations. Midas Holdings’ (Midas) FY09 earnings were in line with expectations. Revenue grew 8.6% to S$150.0m, gross profit gained 20.0% to S$56.6m, and profit from continuing operations escalated by 21.7% to S$37.3m. Including contributions from its Agency & Procurement division, which ceased operations in Mar 09, total profit would have improved by 14.9% to S$37.5m. A final dividend of 0.25 S cents has been declared, taking total dividends for the year to 1 S cent, translating to a 1.0% yield.

Margin expansion in FY09 may reverse in FY10. FY09 gross profit margin expanded by 3.5ppt to 37.7% thanks to generally lower raw material costs during the year. This led to a 1.3ppt improvement in net profit margin to 25.0%. However, margins started to come under pressure in 4Q09 as aluminium prices crept up, compressing the group’s gross profit margin to 29.4% from >40% during the first nine months of the year. Moving into FY10, management expects keen competition to keep a lid on profit margins, but nevertheless aims to maintain its gross profit margin above 30%. It is starting to expand into downstream fabrication services in a bid to stay ahead of competition, and believes that superior margins from this new segment may help to offset the anticipated decline of its Aluminium Alloy division’s margins.

Growth strategy on track, maintain BUY. Midas’ growth strategy remains intact. Its order book currently stands at RMB1.3b and is still growing. Its associate Nanjing SR Puzhen Rail Transport (NPRT) is sitting on a RMB6b order book, and being one of the four licensed metro train manufacturers in the PRC, it is poised to capture a portion of China’s huge railway investments. China is expected to spend RMB823.5b on railway projects in 2010. Midas is expanding its capacity to 50,000 tonnes by end 2010 from the current 20,000 tonnes in response to overwhelming demand. We expect its enlarged capacity to boost earnings from 2H10 onwards. Having strengthened its capitalisation via a placement in Jul 09, the group is equipped with the financial flexibility to fund its expansion plans. We continue to like Midas for its earnings visibility and strong positioning amid a rapidly growing industry. Maintain BUY with S$1.30 fair value estimate.

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