Midas Holdings - On the rebound
- FY16 net profit rebounds 76% y-o-y to Rmb101m, above our expectations.
- Full-year contribution from newly acquired Dalian Huicheng and improvement in core business to drive EPS growth of c. 50% in 2017F.
- Stock is at bombed out valuation of 0.6x P/BV despite improving earnings prospects.
Maintain BUY, TP S$0.36.
- Maintain BUY; FY16 results show the group’s rebound is on track.
- With a strong 4Q16 rounding up 2016 to drive a 76% yo-y improvement in earnings, and strong recovery momentum, we see current valuations for Midas at 0.6x P/BV as bombed out.
- Continually improving earnings should help rerate the stock towards our TP of S$0.36, based on 0.8x FY17F P/BV.
Expect core business to pick up in 2017 following a slowdown in 2H16.
- With order books of c.Rmb800m for its core extrusion business and over Rmb13bn for its associate NPRT, we expect Midas’s existing railway-related businesses to show steady growth into 2017F and 2018F.
- In particular, we expect the core aluminium extruded products division to show improvement in 2017F following a temporary slowdown in project deliveries in 2H16 as demand for metro and high-speed railway cars in China remains robust.
New divisions to drive long-term growth and earnings.
- Looking ahead, the group’s forays into new business segments, i.e. Aluminium Alloy Plates & Sheets and Aluminium Alloy Stretched Plates should help drive long-term earnings recovery for the group.
- We project Midas’s net earnings to rebound substantially from Rmb101m in 2016 to Rmb170m in 2017F and further improve to Rmb194m by 2018F.
- Valuation is undemanding at just 0.6x P/BV, which is near its 5- year low.
- Our target price of S$0.36 for Midas is based on 0.8x P/BV, which we use as our target valuation multiple given that 4.2% ROAE projected for 2017F is still below the group’s cost of capital.
Key Risks to Our View
- Execution risk for new business divisions. With three new business divisions slated to contribute to earnings, Midas needs to show its ability to execute its expansion strategy and that these new divisions can contribute to its short- and long-term growth.