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Investor CentralMidas Holdings Limited - Can it build sustainable earnings on high speed rail contracts - which of the brokers is right?
3/7/2014 – Analysts are divided over whether Midas Holdings Limited will perform well in the coming quarters with the new contracts it has announced.
The company has been on the recovery for three consecutive quarters since Q1FY13 but the first quarter for FY14 fell below expectations.
In its outlook, the company said it is eyeing China's railway developments which are expected to "remain vibrant" because state-owned China Railway Corporation has announced boosts to its investments.
So, demand for urban rail solutions from cities throughout China should not fall.
These are Midas’ Q1FY14 results:
Revenue: +46.7% to RMB296.9 mln
Profit: RMB11.5 mln vs (RMB4.9 mln)
Cash flow from operations: (RMB239.5 mln) vs (RMB84.1 mln)
Dividend: Nil vs Nil
Revenue increased to RMB296.9 mln thanks to a 51.5% increase in revenue from the aluminium alloy extruded products division.
The revenue break-down is:
Transport Industry: +79%
Power Industry: +4.9%
Others: +16.1%
Profit attributable to owners of the company increased to RMB11.5 mln from a loss of RMB4.9 mln because of healthy contribution from associate Nanjing SR Puzhen Rail Transport Co. (NPRT), which offset a gross profit decrease at the Aluminium Alloy Extruded Products division.
Other operating income dropped to RMB1.6 mln from RMB2.6 mln because of less scrap metals sold and lower interest earned.
Costs climbed.
Selling and distribution expenses increased RMB85 mln because of higher transportation and consumables expenses.
Administration expenses increased RMB7.6 mln because of higher depreciation and higher startup costs at new plants.
Finance costs increased because of increased borrowings, of which RMB25.8 mln of the interest on borrowings has been capitalized.
Income tax expenses climbed RMB3.3 mln because of higher profits and the expiration of concessionary tax rates. The Jilin Aluminium Alloy Extruded Products division was taxed at 25%, as compared to 5% in Q1FY13 where concessionary tax rates apply.
Property, plant and equipment (PPE) increased due to additions of new machinery and infrastructure for the new Aluminium Alloy Extruded Products division and the construction of the new plant for the Aluminium Alloy Plates and Sheets division.
Trade and other receivables increased by RMB393.7 mln because of increase in trade receivables of RMB177.8 mln in line with increased sales.
Other receivables increased by RMB215.9 mln because of advance payments made to suppliers for inventories.
Associate contribution from Nanjing SR Puzhen Rail Transport Co. (NPRT) was RMB13.1 mln and this was because of higher train cars deliveries made in this first quarter.
It spent RMB219.4 mln more cash on operations than it earned, an increase in cash burn from 66.9 mln previously.
It made up for the shortfall with net borrowings of RMB489.8 mln.
Debt as at March 31 was RMB3.1 bln, of which RMB2.1 bln is repayable within a year or less.
Bullish analyst report
DBS Vickers is among the most positive brokers on the stock, even though it says Midas' net profit turnaround for Q1 did not meet expectations.
But it expects stronger quarters when associate Nanjing Puzhen contributes and high speed railway components are delivered.
DBS Vickers has a BUY call and a price target of S$0.64.
Bearish analyst report
CIMB Research says the first quarter performance did not meet expectations and new contract wins will not quell Midas' woes.
Midas' earnings are now unsustainable without high speed rail contracts.
Even the new venture in cold-rolled aluminium plates and sheets faces uncertainty.
Both plants in Luoyang and Jilin are underutilised and the high start-up costs for new plants have eaten into profits.
Customers are taking longer to pay for their orders; they now take 428 days as compared to 253 days previously in the first quarter of 2013.
Debt is deeper, bringing gearing to an all-time-high of 0.65x.
CIMB has a HOLD call with a price target of S$0.49.
OCBC Investment Research says unexpectedly high costs prompted it to lower its outlook on the stock.
First quarter performance was disappointing but there are prospects in China's railway sector because China Railway Corporation’s (CRC) capex commitments.
CRC has increased its railway fixed asset investments target to RMB800 bln for 2014 (up from RMB630 bln), which implies more high speed train car tenders to come and there could be orders for Midas in the third quarter.
CRC has also started even more projects (from 48 to 64) and has committed itself to at least 7,000 km of additional operational railway lines in 2014, with railway equipment investment up to RMB143 bln from RMB120 bln.
OCBC Investment Research has a BUY call and a price target of S$0.61, revised from S$0.66.
China Railway Corporation has posted its development progress update.
This World Bank paper provides some insight into the state of urban connectivity in China to date.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
1. Why are customers taking so long to pay?
It used to take customers eight months to pay, now they take more than a year!
Is this a permanent change?
If nothing can be done about it, how will it manage its cash flow?
2. What led to this change in payment terms?
What payment collection system is Midas currently using?
Is Midas facing a customer communications breakdown when it comes to payment?
What does it auditor say about this extension?
The current auditor for Midas Holdings is Mazars LLP, appointed with effect from FY2013 according to the 2013 annual report.
We previously asked about the departure of its auditor Messrs BDO LLP and its resignation in our October 2012 story.
Total number of questions in the full story: 10)
We have invited the company to an on-camera interview, and/or to reply to our questions in writing.
At the time of publication we have not received a reply (which is why you are seeing this message).
We will update this article if we do.
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