Midas Holdings - Not as bad as it seems (DBSVickers)

BUY S$0.41 STI : 2,850.59

Price Target : 12-Month S$ 0.72 (Prev S$ 1.05)

Reason for Report : Forecasts change after interim earnings.

Potential Catalyst: Contract wins and earnings execution.

DBSV vs Consensus: With share price having declined significantly, most of the street have kept their BUY calls despite also lowering eanrings projections, as we have done.

• Interim earnings slightly below expectations, PATMI +20% yoy to RMB123m

• FY11/FY12 forecasts cut by 5%/9% on lower order win assumptions

• Metro and export contracts to help cushion potentially lower HSR flows

• Maintain BUY, lowered TP to S$0.72, based on 12 FY12 PE.

2Q earnings up 15% yoy to RMB63m. Revenue grew by 33% yoy to RMB610m and GP increased 41% yoy to RMB210m in 1H2011. With associate NPRT reporting 51% lower earnings and doubling of taxes to RM42m, net profit only grew 20% yoy to RMB123.4m. An interim dividend of S 0.5cts was declared.

Metro and export wins to bolster current RMB1.1bn order book. In view of the Ministry of Railway’s stance to check the safety of existing and new high speed railway (HSR) lines, and temporarily suspend the examination and approval of new HSR projects, we lower our order win assumptions by about 15%-20% for FY11 and FY12, to RMB1.1bn and RMB1.3bn respectively. Thus we lowered our FY11 and FY12 EPS forecasts by 5% and 9% respectively. However, Midas should continue to win more metro and export orders to help cushion the lower orders from the HSR segment, which would lower but not derail Midas’ growth.

Maintain BUY. At 0.8x P/BV and 8x FY11 PE, the stock is clearly over-sold and our target price of S$0.72, based on 12x FY12 earnings, implies over 50% upside. We have lowered our PE multiple to reflect a de-rating for its HKlisted peers. For the stock to re-rate further, there needs to be better clarity on China's railway investment policy (whether or not the RMB2.8trn budget under the 12th 5-year plan is intact or if it's going to be reduced).