Midland - Prospects of a cyclical recovery remain intact; accumulate on weakness

Midland issued a profit warning on 23 January, cautioning that it would record a loss for FY08. We believe the main reason is an estimated HK$150m in additional provisions for bad debt related to commission income associated mainly with primary- market projects sold in 2H07-1H08.

However, Midland is in the midst of a notable downsizing exercise, with its branch and staff numbers falling by 20.4% and 30.2% from the peak in 1H08, to 460 and 5,767, respectively, at the end of December 2008. In our view, this, together with the recent pick-up in transaction volume, should underpin its prospects for a cyclical recovery from FY09.

We think Midland’s current valuation (trading at a PBR of 1.03x) is attractive, given that the stock has rarely traded below book value over the past five years (the average was 3.08x).

Stripping out its net cash of HK$1bn (HK$1.44/share), Midland is trading currently at a PER of 1x peak earnings and 3.5x average earnings since 1995. We maintain our 2 (Outperform) rating and have lowered our six-month target price to HK$3.30 (from HK$3.66), based on a target PER of 10x on our FY09 EPS forecast (equivalent to HK$2.58/share), plus a 50% discount to our estimate of its net cash per share (equivalent to HK$0.72/share) by the end of FY09.

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