Midas Holdings: Lack of near-term upside catalysts (DMG)

(NEUTRAL, S$0.375, TP S$0.40)

Midas’ share price has come off 7% since our Aug update, in-line with STI’s dismal performance and continued to be weighed down by negative news flow in Sep e.g. Shanghai metro train crash and delay in Ministry of Railways’ (MOR) issue of bonds. Also, fixed asset railway investments have been dipping over the past few months to RMB35b in Aug11, down 54% YoY. We now assume lower FY11-FY12 extrusion order wins of RMB600m-RMB300m (old: RMB700m-RMB750m), and smaller NPRT contribution of RMB29m-RMB29m (old: RMB29m-RMB57m). Our corresponding net profit estimates are revised down by 5%-28% respectively to RMB250m-RMB200m, with a 20% YoY contraction in FY12. While we see the negatives as largely priced in at trough 0.7x forward PBR, we believe investors will take a more prudent approach before building position. Hence, share price is likely to trend side-ways in near-term until comfort can be gained on MOR’s financial healthy and order wins recovery. Given a lack of near-term catalyst, we downgrade Midas to NEUTRAL with a lower TP of S$0.40 (old: S$0.65), pegged to 12x FY12F PER (old: 15x FY11F PER).

It never rains but pours. After a widely publicised Wenzhou high speed train crash in Jul11, the industry continues to be plagued by a negative turn of events in Sep e.g. 1) Shanghai metro train crash on 27Sep11, 2) reports that PRC’s MOR delayed ~RMB60b payment to its contractors, causing some projects to suspend and 3) reports that MOR postponed its RMB20b bond issue scheduled on 26Sep11 to 12Oct11, with rising borrowing costs. It was further reported that interest rates ranged between 5.13%-6.13% for 7-year tenure and 5.53%-6.53% for 20-year tenure, compared to Oct 2010’s 4.39% for 15-year tenure issue.

Assume lower order wins. We now assume FY11-FY12 extrusion order wins of RMB600m-RMB300m (old: RMB700m-RMB750m), and revise down our revenue estimates to RMB1.2b-RMB0.9b (old: RMB1.3b-RMB1.2b). Extrusion order wins tallied RMB323m YTD. Close to 88%-50% of our FY11-FY12 estimates for extrusion are backed by announced order wins respectively.

Assume lower NPRT contributions. Our assumption for NPRT’s revenue is reduced to RMB1.6b p.a. (old: RMB1.6b and RMB3.2b) over the next two years, resulting in lower associate’s contribution of RMB29m-RMB29m (old: RMB29m-RMB57m). NPRT’s order wins tallied RMB3.1b YTD.

Valuations at trough but could be a value trap. While we see the negatives as largely priced in at trough 0.7x forward PBR, we believe investors will take a more prudent approach before building position in the company. Hence, share price is likely to trend side-ways in near-term until comfort can be gained on MOR’s financial health and order wins recovery. We downgrade Midas to NEUTRAL with a lower TP of S$0.40 (old: S$0.65), pegged to 12x FY12F PER (old: 15x FY11F PER), -1SD to its three-year historical mean of 16x.

Key risks. Key risks to our revised recommendation include a swift resolution in PRC railway safety issues and high funding costs (e.g. a possible injection of liquidity by the PRC government), as well as the award of a stream of large contract wins.