By Lee Wen Ching
Mon, 19 Jul 2010, 09:08:50 SGT

Midas Holdings (Midas) is expected to post its 2Q10 results in mid Aug, for which we are forecasting revenue of S$47.7m (+26% YoY, +4% QoQ) and net profit of S$9.9m (+5% YoY, flat QoQ). Earnings growth momentum should accelerate from 2H10 onwards as the group’s enlarged aluminium alloy production capacity comes on stream, and as it forays into downstream fabrication services. Our estimates imply an earnings split of 42% in 1H10 and 58% in 2H10. Midas recently signed a Letter of Intent to provide Bombardier Sifang (Qingdao) Transportation with downstream fabrication services. While financial details have not been disclosed, we believe that the group’s expansion into downstream fabrication will not only boost revenues but also lift its profit margins. Midas is poised to leverage on what we anticipate could be a multi-year boom of China’s infrastructure development. We reiterate our BUY rating on the stock in view of its robust long term outlook. Our valuation peg, however, has been trimmed to 20x (from 25x) blended FY10/FY11 EPS in view of heightened risk aversion as reflected by the recent decline of the FTSE China Index, bringing our fair value estimate to S$1.27 (from S$1.58).

Expect steady performance in 2Q10. We expect Midas Holdings (Midas) to announce its 2Q10 results in mid Aug, and are projecting revenue of S$47.7m (+26% YoY, +4% QoQ) accompanied with net profit of S$9.9m (+5% YoY, flat QoQ). Midas’ growth strategy remains on track, buoyed by China’s massive railway investments coupled with the group’s ongoing capacity expansion which will enable it to capture the influx of rail-related spending. According to Bloomberg data, aluminium prices fell 15% QoQ to USD1951.25/mt in 2Q10. Should commodity prices continue on a downtrend, we would expect a sustained decline of aluminium prices to boost Midas’ gross profit margin given that the metal constitutes 70%-80% of its raw material costs. And should material prices rebound sharply, we note that Midas’ gross profit margins are protected via cost-plus or back-to-back pricing contracts.

Earnings growth momentum to accelerate from 2H10. We anticipate an acceleration of earnings growth momentum from 2H10 onwards as the group’s enlarged capacity comes on stream and as it forays into downstream fabrication services for car body components. Midas recently signed a Letter of Intent to provide Bombardier Sifang (Qingdao) Transportation (BST) with downstream fabrication services. While financial details have not been disclosed, we believe that the group’s expansion into downstream fabrication will not only boost revenues but also lift its profit margins. In addition, Midas is expanding its aluminium alloy production capacity to 50,000 tonnes (from 20,000 tonnes) by the end of the year by adding three extrusion production lines to the current two. The third and fourth production lines commenced production in 2Q10 and the fifth is expected to come on stream in 4Q10, thereby boosting the group’s output from 2H10. Our estimates imply an earnings split of 42% in 1H10 and 58% in 2H10.

Poised for a multi-year boom. Midas is poised to leverage on what we anticipate could be a multi-year boom of China’s infrastructure development. The PRC government has dedicated RMB823.5b to railway infrastructure investments in 2010 alone and we anticipate additional capex to flow through over the next few years as China endeavours to add 13,000km of high-speed railway to the current 6,552km by 2012. We are maintaining our BUY rating in view of Midas’ robust long term growth outlook. Our valuation peg, however, has been trimmed to 20x (from 25x) blended FY10/FY11 EPS in view of heightened risk aversion as reflected by the recent decline of the FTSE China Index, bringing our fair value estimate to S$1.27 (from S$1.58).