Midas Holdings - DBS Research 2016-08-15: Look ahead to better 2H16

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MIDAS HLDGS LIMITED 5EN.SI

Midas Holdings - Look ahead to better 2H16

• 2Q16 profit of Rmb18.7m slightly below expectations.
• Acquisition of Huicheng to boost profit from 2H16.
• Maintain BUY, TP adjusted to S$0.38 on lower RMB vs SGD forex rate. 

Maintain BUY; 1H16 results slightly below expectations but expect more substantial recovery from 2H16 onwards. 

• We see value in Midas at 0.5x FY16 P/BV as we project earnings to start recovering more substantially from 2H16 onwards, as contribution from its new acquisition Huicheng kicks in.

2Q16 earnings slightly below. 

• Midas reported net profit of Rmb18.7m, up 62% y-o-y, as lower finance costs (-25% y-o-y) and higher contribution from associate (+53% y-o-y to Rmb10.6m) helped lift earnings. However, revenue and gross profits grew by only 2.3% and 2.8% respectively, which is below our expectations. 

Expect more substantial recovery for core business from 2H16.

• With order books of c. Rmb900m for its core extrusion business and c.Rmb12bn for its associate NPRT, we expect Midas’ existing business to show steady improvement from 2H16. 
• Midas is also in a good position to win more orders to raise its utilisation and earnings on the back of firm demand for high-speed and metro trains in China and abroad.

Acquisitions and a new segment to drive long-term growth.

• Looking ahead, the group’s forays into new business segments, i.e. Aluminium Alloy Plates & Sheets, Aluminium Stretched Plates and Aluminium Hot Roll Plates & Coils will help drive growth. 
• We project Midas’ net earnings to rebound substantially from Rmb57m in 2015 to Rmb156m in 2016F and further improve to Rmb215m by 2017F.

Valuation

• Valuation is undemanding at just 0.5x P/BV, which is at its 5- year low. 
• Our target price of S$0.38 for Midas Holdings is based on 0.8x P/BV, which we use as our target valuation multiple given that 5% 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 quickly contribute to the group’s short- and long-term growth.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.38 Down 0.410