Midas - Lower revenue is inconsequential

Midas posted revenue of $31.4m and net profit attributable of $8.5m for the period. Though revenue fell 13.1% on a yoy basis, bottomline grew 11.2% on a yoy basis and 0.9% on a qoq basis. This is largely within our expectations, forming 22.8% of our full year net profit forecast. The Group also maintained its quarterly interim cash dividend of 0.25cents per share.

Business volume for its Aluminum Alloy remains stable. The decline in revenue is mainly attributed to the lower selling prices of the Group’s aluminum extrusion profiles due to falling raw material costs. We believe this is inconsequential to the Group’s profitability since under its pricing model, it will be offset by the improvement of gross margins.

Midas utilises either a cost-plus or back-to-back pricing model. In a cost-plus contract, the customer effectively takes on the raw material price risk whereas in a back-to-back contract, Midas places an order for the raw material immediately at the prevailing future price. In both situations, the customer pays an absolute dollar fee per tonne of aluminium processed. Hence, the Group’s profitability is not affected by raw material prices.

Midas’s 31.5% associated company, Nanjing SR Puzhen Rail Transport Co (NPRT), a metro train body manufacturer, did not contribute in this period as there was no delivery scheduled. As highlighted earlier, we expect to see its main contributions in 2H09, where the delivery schedule is skewed towards. NPRT currently has an orderbook of $1b.

We continue to be optimistic about the Group’s prospects once capacity expansions kick in for FY10. Our target price is lifted to $0.82 based on 15X FY10 estimated net profit to reflect the overall improvement in market conditions. We have kept our profit estimates unchanged, but adjusted our revenue forecasts in line with the change in raw material costs.

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