Midas Holdings - DBS Research 2016-11-18: Recovering slowly but surely

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MIDAS HLDGS LIMITED 5EN.SI

Midas Holdings - Recovering slowly but surely

• 3Q16 net profit up 63% y-o-y to Rmb23m; 9M16 earnings up 41% y-o-y to Rmb51m.
• FY16/17 forecasts cut by 49%/22% on slower ramp-up from new acquisitions and projects.
• Stock offers value at 0.5x P/BV.
• Maintain BUY, TP S$0.37.

Maintain BUY; 3Q16 results continue to show recovery albeit at a slower pace than expected. 

• We see value in Midas at 0.5x FY16 P/BV as we project earnings to continue recovering into 2017 and 2018 as new projects and acquisitions ramp up their contribution to the group.
• 3Q16 earnings up 63% y-o-y on higher associate contribution.
• Operating earnings fell 12.4% y-o-y to Rmb46m on revenue growth of 2.1% to Rmb421m due to product mix as the fall in revenue from the higher-margin extrusion business was offset by two months of contribution from the newly acquired stretched plates business (Huicheng). 
• Meanwhile, contribution from associate NPRT rose to Rmb12.4m from Rmb2.3m a year ago, driving net earnings to improve to Rmb22.6m (+63% y-oy).

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 Rmb14bn for its associate NPRT, we expect Midas’ existing businesses to contribute steadily into 2017F and 2018F. 
• In particular, we expect the core aluminium extrusion business 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.

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 should help drive earnings recovery. 
• We project Midas’ net earnings to rebound substantially from Rmb79m in 2016 to Rmb168m in 2017F and further improve to Rmb192m by 2018F.

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 4% 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.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-18

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.38 Same 0.380