Midas Holdings Ltd: Associate will drive 2009

Meets expectations. Midas Holdings (Midas) posted revenue of S$144.5m (+2.9% YoY) and net profit of S$32.7m (+2.4% YoY). The results are almost exactly in line with our FY08 expectations as we anticipated slower contribution from its associate Nanjing SR Puzhen Transport (NPRT) in view of its ramp up phase and higher taxation. Utilisation continues to remain high at >80% and Midas will be phasing in its third line at a slower pace than initially expected. Management guides that the third line will be up and running in 1Q10 instead of 3Q09. The latter half of 2009 will be focused on ramping up its downstream processing capabilities, where Midas will develop capabilities to deliver semi-completed train components vs. plain-vanilla aluminium profiles. We expect this to muster up its margins.

China walks the talk. Railway investment totalled about RMB680b in 2008 alone (Exhibit 1) and is set to increase over the next few years as RMB2t of the RMB4t stimulus plan has been allotted to development of rail transportation. While Midas is not engaged in the construction phase, it will receive the windfall from the need to fill the tracks with trains. 32.5% owned NPRT will be its key vehicle to tap on this massive infrastructural spending. Based on demand for passenger and freight transportation and production of newly built railways, planned investments could range ~RMB500b in train-set purchase in the next four years.

Associates to drive earnings for 2009. Rise in core earnings for aluminium profiles will likely be marginal as Midas continues to operate two lines but could spring surprises if utilisation improves and margins edge up when more back-to-back contracts, which typically command better margins, are signed. Therefore, we think that NPRT will thus be the driver of earnings for Midas as it starts to deliver part of its 768 train car order book. NPRT is pursuing 4 more projects that could add up to 400 cars to its order book.

Economies of scale will accelerate and we should see better contributions. Core operations steady. Our earnings have been mitigated as we move the third line's operation till 2010. We maintain our BUY call with fair value of S$0.63 (prev: S$0.65) based on 14x (prev: 12x) FY09F PER. Our peg is raised in view of the stronger valuations that its peers are enjoying due to flow down benefits of the stimulus plans.

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