Maintain BUY; more substantial recovery from 2016 onwards. We see value in Midas’ share at 0.5x FY16 P/BV currently as we project that the Group’s earnings will to start to recover more substantially from 2016 onwards, as contribution from its new aluminium plate and sheet plant kicks in. We see the stock rerating towards our TP of S$0.49, based on 0.9x FY16 P/BV as earnings improve and ROE increases.
Decent order books with potential for more, underpinned by strong railway demand. With an order book of over RMB1bn for its core aluminium alloy extrusion segment, and over RMB10bn for its associate Nanjing Puzhen Railway Transport, Midas is in a good position to win more orders to raise its utilisation and earnings on the back of firm demand for highspeed and metro trains in China and abroad.
New business division to diversify revenues and drive recovery. The completion of the alloy plate and sheet plant will raise the Group’s capabilities by boosting Midas’ annual aluminium alloy production capacity from 50,000 tonnes in FY15 to 160,000 tonnes in FY16. It should help to diversify its revenues away from the rail segment as the new alloy plate and sheet products will also be in demand from the aviation, shipbuilding, automobile, general industry and packaging sectors.
Valuation is undemanding at just 0.5x P/BV, which i Valuation is undemanding at just 0.5x P/BV, which is at its 5 s at its 5- year low. Our target price of S$0.49 for Midas Holdings is based on 0.9x P/BV, which we use as our valuation multiple given that 5.4% ROAE projected for 2016F is still below the Group’s cost of capital.
Key Risks to Our View:
Insufficient demand or greater competition would impact earnings. Lack of new rail order wins or failure to generate interest for plate and sheet products could derail Midas from its recovery, while greater competition could erode margins. (Read Report)
Source : DBS Group Research