Midas Holdings - Worst should be over (DBSV)

BUY S$0.37 STI : 2,830.14

Price Target : 12-Month S$ 0.48 (Prev S$ 0.72)

Reason for Report : 3Q11 Results

Potential Catalyst: Contract wins

DBSV vs Consensus: We are more optimistic on outlook as orders should improve in 2012

• 3Q11 profit declined 60% y-o-y to RMB27m, despite 5% revenue growth to RMB259m

• Factoring in lower order wins and higher finance costs, we cut FY11/12F earnings by 34%/33%

• Expected pick-up in train orders from MoR in 1H12 could kick-start orders, with Midas’ valuations at rock bottom levels

• BUY with lowered TP of S$0.48 (1x P/B).

3Q earnings impacted by railway industry slowdown, as contract wins dried up. This was due to (i) gross profit growth was flattish at RMB87m on tepid revenue growth; (ii) operating expenses were higher due to capacity expansion; (iii) contribution from associate NPRT was negative on lesser trains being delivered; and (iv) finance costs were substantially higher as Midas took on more short-term borrowings to finance higher receivables and inventories.

Forecasts slashed... Factoring in lower order wins up to 2Q12 and higher finance costs, we cut our FY11 and FY12 net profit forecasts by 34% and 33% to S$40m and S$48m respectively.

... but order flows expected to resume in 2012. We believe recent developments such as the 50% tax reduction on MoR bonds and the backing of RMB20bn worth of MoR bonds by the State Council as government debt points to the likelihood of high-speed projects resuming soon, with likely equipment order flows from 1H12 onwards. This would be positive for upstream suppliers like Midas.

Stock is bombed out; BUY with S$0.48 TP. The stock is trading at <0.8x FY11 P/B and with industry prospects improving, we believe the worst is over for Midas. Our revised TP of S$0.48 is based on 1x P/B.