Midas Holdings - FY16 beat expectations
- Growth driven by improved margins.
- New businesses to lower GPM ahead.
- No dividend declared but for good reason.
Core business revenue fell on fewer orders
- Midas Holdings Limited’s (Midas) FY16 revenue fell 1.8% YoY to RMB1485.7m, mainly due to a 13.8% decline from its core Aluminium Alloy Extruded Products (AEP) segment to RMB1293.3m on fewer high-speed train orders, but partially offset by the consolidation of results of its recently acquired Aluminium Alloy Stretched Plates (AASP) business (+RMB182m).
- However, as Midas’ core business performed more higher-margin fabrication works, AEP’s FY16 GPM rose 3ppt to 30.0%, and led to a 2.8ppt increase in overall GPM to 29.7%. Higher selling and distribution expenses (+3.8%) as well as administrative expenses (+7.6%) were more than offset by a 14.3% decrease in finance costs on lower interest rates of bank borrowings.
- In addition, Midas’ share of profits of an associate (NPRT) also grew 10.5% to RMB35.0m due to increased delivery to its customers during the year. Consequently, FY16 PATMI beat our expectations as it surged 76.3% YoY to RMB100.8m, and formed 148.2% of our FY16 forecast.
Expects lower overall margins going forward
- Looking ahead, we expect core business (i.e. AEP segment) revenue to pick up but given that AASP business will record its first full-year revenue contribution in FY17, as well as the targeted start of commercial production for its start-up aluminium light alloy plant (JMLA) from 2Q/3Q17, we forecast AEP’s revenue to fall to 82.3% of total revenue in FY17 (FY16: 87.1%). We expect this proportion to further drop to 74.5% in FY18 as JMLA continues to ramp up production.
- Consequently, with both AASP and JMLA commanding much lower GPM compared to AEP segment, we expect overall GPM to fall to the range of 26-27% over the next two years. That said, we believe it remains crucial to closely monitor the ramp up of Midas’ JMLA business.
Slightly higher FV of S$0.255
- While we factor in further share dilution given that Midas is expected to issue an additional 271.3m new shares relating to its AASP acquisition (earn-out), we maintain HOLD with a slightly higher FV of S$0.255 (prev: S$0.245) as we introduce our FY18 forecasts and roll-forward to 0.6x FY17F P/B.