Midas - expect rail-related contract wins in coming

Midas reported 1Q09 earnings that were in line with expectations, as earnings rose by 11% yoy to S$8.5m. Whilst revenue declined by 13% yoy, due mainly to lower ASPs for their aluminium extrusion products as a result of lower raw material prices and lower contribution from the PE pipe business. Gross profit still rose by 2% yoy to S$13.2m as G.P. margin improved to 42% from 36%. Railway related projects accounted for nearly 70% of total revenue. Otherwise, despite associate NPRT reporting a small loss, lower operating costs and lower taxes helped lift net earnings to 11% growth.

Operating cashflow was a healthy S$15m and the Group invested a further S$16m to expand its capacity and capabilities. Company remains in a net cash position.

Looking ahead, we expect Midas to win more rail-related projects in the coming months as China executes on its infrastructure projects. Potential projects up for grabs include the Beijing-Shanghai high-speed railway line and metro projects in Shanghai, Hangzhou, Guangzhou and Xi ‘an. We also expect a stronger contribution from NPRT, which had no deliveries scheduled in 1Q, but has a backlog of 768 train cars to be delivered from 2H09 onwards.

Maintain BUY, target price raised to S$0.82, as we raise our valuation multiple to 15x FY09/FY10 earnings for Midas, still at a 25% discount to HK-listed CSR Zhuzhou Times Electric, which has been re-rated strongly in recent weeks to 20x FY09 PER.

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