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 (see Figure 6).
■ 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. (Read Report)
Source : RHB Research