The proceeds will immediately fund Midas’s 4th and 5th extrusion production lines fully, which are imperative if the Group wants to benefit from the next round of contracts flowing to aluminium alloy profile suppliers around 4Q09. While bank loans were another alternative, Midas’s management has always preferred to remain debt-free.
The amount raised for expansion is in line with our previous expectations of $40m a line. These two lines would be for larger profiles, which allow Midas to supply a fuller range. We expect the 4th line to be operationally ready from 4Q10 and the 5th line from 1Q11. This would bring total capacity up from the current 30,000 tonnes to 50,000 tonnes per annum.
Even taking into account the expected schedule for the two new extrusion lines, we estimate Midas to be already fully booked till FY10 and 42% booked for FY11. Our profit estimates assume Midas to be 90% booked for FY11, which is equivalent to new contracts for another 100 high-speed train set. This is not unrealistic given that the 2nd round of order from Ministry of Railway is three times larger than the 1st round in March 09.
Our adjusted profit estimates mean FY10 EPS will be diluted by 10% due to the limited impact of capacity expansion by then, while FY11 EPS has been boosted by 8%. Our target price has been adjusted to $0.985, still based on 18X FY10E. We recommend buying on weakness, ahead of possible strong contract announcements in 3Q09-4Q09.
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