Midas - 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%.


Technical Analysis
Daily Chart
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

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