RHB Securities 2015-08-12: Midas Holdings Ltd - Lowering Aluminium Price Assumptions. Maintain NEUTRAL.

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MIDAS HLDGS LIMITED 5EN.SI

Lowering Aluminium Price Assumptions 

• Lower aluminium prices will benefit Midas’ extrusion business, which uses the metal as a key raw material. 
• We raise FY15F/FY16F profit by 6%/14% as we lower our aluminium price estimates. 
• Maintain NEUTRAL and SGD0.35 TP (13% upside, 0.65x FY15 P/BV) amid expensive FY15 earnings-based valuations and dismal ROE. 
• Elevated leverage and difficulty in forecasting revenue recognition based on announced order book remain key concerns despite strong profit growth outlook in FY16. 

 Aluminium price to stay low. 

• The LME aluminium price is trading close to a 6-year low amidst rising oversupply of the metal. 
• Instead of reducing output, producers are increasing aluminium production. 
• China, which accounts for 56.2% of global supply, reported an 11% rise in output during 1H15. 
• We expect the oversupply situation to persist and estimate the metal to average USD1,700/tonne in FY15 and remain unchanged in FY16. 

 Increasing leverage is a concern. 

• Midas borrowed funds to construct a 100,000 tonnes per annum plates and sheets plant. 
• Its net debt/equity has increased to 0.96x in 1Q15 from 0.17x in 1Q12. 
• While the capacity expansion will be complete by end-FY15, its inability to generate positive free cash flow (FCF) could force Midas to maintain elevated levels of net debt. 
• We estimate net debt/equity to increase to 1.14x by end-FY16. 

 Revenue recognition is difficult to estimate. 

• Although we estimate FY16 profit growth of 77%, we remain cognisant of the incongruence relating to the company’s historical order inflow, delivery schedule and reported revenues/earnings. 
• During FY10-14, Midas’ reported revenue exceeded the orderbook delivery-based revenue estimate by 23-120%. 

 Prefer Hong Kong-listed plays. 

• Winston Cao, our Hong Kong-based analyst views China Railway Group (390 HK, BUY, TP: HKD10.17) and China Railway Construction (1186 HK, BUY, TP: HKD15.50) as better plays on rising fixed asset investment in China. 
• Both stocks offer higher ROEs and are trading at lower P/Es compared to Midas. 

 Dismal ROE justifies low valuation. 

• At 0.56x FY15 P/BV, Midas is trading close to the bottom of its historical P/BV valuation, which we deem fair given its dismal 2.0% FY15F ROE.

Shekhar Jaiswal | http://www.rhbgroub.com/ RHB Securities 2015-08-12

NEUTRAL Maintain NEUTRAL 0.35 Same 0.35