A sound long-term investment: MIDAS HOLDINGS

Source:DMG

Right place, right time. Midas Holdings, which has investments in aluminium alloy extrusion products and polyethylene pipes, is set to enjoy strong growth on the back of the railway sector. It will also get a boost from 32.5%-owned associate NPRT, being one of the four entities with a licence to assemble/produce Metro train cars in China.Order book flow should remain robust going forward. Midas’ current order book is worth S$120m, with deliveries stretching out over the next two years. NPRT has a much bigger order book, clocking up RMB4.5b worth of orders (784 train cars) for delivery between FY09 and FY11. With many more railway systems to be added in major cities and also connecting various cities, we are confident Midas and NPRT will be adding to their current tallies.Direct beneficiary of the China stimulus package. Approximately RMB2t is budgeted by the Ministry of Railways (MOR) for expansion of China’s existing railway system between FY09 and FY12, mostly for intercity train systems. As much as RMB600b will be spent in FY09 out of this RMB2t. The MOR has also announced it will spend at least RMB500b on rolling stock alone in the next four years. We have estimated that Midas will see a RMB2b surge in orders, based on its 80% market share in AA train car body extrusion.Stable earnings growth. From FY04 to FY08, Midas grew its top line 140% from S$60.2m to S$144.5m, a CAGR of 24.5%. Despite the current credit and economic crisis, we believe Midas will continue its path of strong and stable earnings growth with the construction of a third AA production line and higher contributions from NPRT going forward.Valuation. We derive a 12-month fair-value target price of S$0.73 using our DCF model, applying a WACC of 15.5%, a beta of 1.1 and a terminal growth rate of 1%. At the last traded price, the stock is trading at 10.1x FY09 and 7.5x FY10 P/E, offering a yield of 2.3% and 2.9% respectively. Its China-based peers trade at 21.8x FY09 and 16.5x FY10 P/E. Initiate with BUY.

source:DMG

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