Midas Holdings - OCBC Investment 2017-08-16: Cautious Amid Signs Of Recovery

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MIDAS HLDGS LIMITED 5EN.SI

Midas Holdings - Cautious Amid Signs Of Recovery

• 1H17 exceeded expectations.
• Won contracts worth RMB184m.
• Wait for clarity over execution of new business.

Growth driven by higher business volume and better margins 

• Midas Holdings Limited’s (Midas) 2Q17 revenue jumped 32.1% YoY to RMB505.6m, mainly due to a 3.5% growth in its Aluminium Alloy Extruded Products (AEP) revenue to RMB381.4m, and the consolidation of results of its recently acquired Aluminium Alloy Stretched Plates (AASP) business. 
• 2Q17 overall gross margin improved 3.6ppt YoY to 31.4%, lifted mainly by a 3.6ppt improvement in AEP’s gross margin at 31.6%.
• In-line with higher business volume, 2Q17 operating expenses rose 14.4% YoY to RMB68.3m, as well as a 52.1% increase in finance costs on higher interest rates and higher outstanding borrowings. Consequently, coupled with a 43.5% YoY decline in income tax, 2Q17 PATMI surged 197.1% to RMB55.5m. 
• For 1H17, PATMI jumped 193.8% YoY to RMB84.3m, forming 79.3% of our FY17 forecast. This exceeded our expectations.

Wait for clarity over execution of new light alloy business 

• Looking ahead, we expect core business (i.e. AEP segment) revenue to pick up on higher orders but forecast overall GPM to fall to ~28-29% with full year contributions from AASP. 
• Midas also announced that it has been awarded three AEP contracts from customers in PRC, worth a total of RMB184.4m – two from CRRC Tangshan (RMB114.7m) and one from CRRC Changchun Railway Vehicles (RMB69.7m). All three contracts are for the supply of aluminium alloy extrusion profiles and fabricated parts for high speed trains. These contracts, which are positive for Midas’ growth, are slated for delivery in FY17. 
• All considered, we believe Midas’ share price performance still largely hinges on the execution of its new business – JMLA, which we do not expect to ramp up until FY18, at the earliest. 
• In our view, the key to JMLA’s success is dependent on the automobile industry’s adoption of aluminium instead of steel for car manufacturing, which has no clear visibility over the timeline.

Maintain HOLD 

• While we raise our FY17F/18F PATMI by 33%/49% on above expectations results, we lower our target peg from 0.6x to 0.5x FY17F P/B given the uncertainty over JMLA. 
• Consequently, our FV decreases from S$0.245 to S$0.225. 
• Maintain HOLD.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-08-16

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.225 Down 0.245