Midas Holdings Ltd - Prospects not derailed (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.575

Fair Value: S$0.88

First a graft scandal, now an unfortunate accident. Midas Holdings (Midas) has seen its share price plummet 39.2% YTD following the corruption scandal surrounding the now dismissed former Minister of Railways Liu Zhijun in Feb and more recently the tragedy involving two high-speed train collisions in China. The latter took place on 23 Jul 2011 in Wenzhou City and occurred when the railway signal system which had design flaws failed to alert the colliding bullet train of another stalled train (which had been struck by lightning) on the track.

Contract tenders likely to be delayed in near term...

China's Premier Wen Jiabao has ordered a thorough investigation process to be made public to increase transparency. A two-month safety overhaul has since been launched from 24 Jul to identify and resolve safety issues and risks in a bid to improve the railway system and assuage public outrage over the accident. Hence we expect uncertainty to surround railway manufacturers and their suppliers such as Midas in the near-term as the tendering of contracts by China's Ministry of Railways (MOR) is likely to be delayed in the midst of ongoing investigations and safety checks. We had previously highlighted our optimism that Midas' order book momentum could gain traction from 2H11.

…but long term outlook remains positive. Notwithstanding this latest setback, we maintain our positive view on the longerterm prospects on China's railway sector. The railway sector remains strategically important to China's economic development as well as catering to the transportation needs of its people. Moreover, Midas currently has an order backlog of ~RMB1.3b which should partially mitigate the effects of a delay in contract wins.

Maintain BUY albeit reduced fair value estimate. We have reviewed our assumptions in light of current developments and see the need to lower our FY11/FY12F revenue and earnings estimates by 9.1%/7.5% and 10.5%/7.7% respectively due to likely delays in contract tenders by MOR in the short term horizon. We also lower our valuation peg on Midas to 18x FY11F EPS (previously 20x), taking into consideration the increasing uncertainty and muted sentiment regarding the near-term industry outlook. Our fair value estimate consequently declines from S$1.10 to S$0.88. Nevertheless, we opine that Midas' share price has already been over-sold and much of these negativities are likely priced in. Valuations are undemanding, in our opinion, as the stock is now trading at 9.5x FY12F PER, close to one standard deviation below its historical average forward PER; against our projected EPS CAGR of 12.8% from FY10-FY12F. With an upside potential of 53.0%, we maintain our BUY call on the Midas.