• Growth driven by improved margins
• New businesses to lower GPM ahead
• No dividend declared but for good reason

Core business revenue fell on fewer orders

Midas Holdings Limited’s (Midas) FY16 revenue fell 1.8% YoY to RMB1485.7m, mainly due to a 13.8% decline from its core Aluminium Alloy Extruded Products (AEP) segment to RMB1293.3m on fewer high-speed train orders, but partially offset by the consolidation of results of its recently acquired Aluminium Alloy Stretched Plates (AASP) business (+RMB182m). However, as Midas’ core business performed more higher-margin fabrication works, AEP’s FY16 GPM rose 3ppt to 30.0%, and led to a 2.8ppt increase in overall GPM to 29.7%.

Higher selling and distribution expenses (+3.8%) as well as administrative expenses (+7.6%) were more than offset by a 14.3% decrease in finance costs on lower interest rates of bank borrowings. In addition, Midas’ share of profits of an associate (NPRT) also grew 10.5% to RMB35.0m due to increased delivery to its customers during the year. Consequently, FY16 PATMI beat our expectations as it surged 76.3% YoY to RMB100.8m, and formed 148.2% of our FY16 forecast.

Expects lower overall margins going forward

Looking ahead, we expect core business (i.e. AEP segment) revenue to pick up but given that AASP business will record its first full-year revenue contribution in FY17, as well as the targeted start of commercial production for its start-up aluminium light alloy plant (JMLA) from 2Q/3Q17, we forecast AEP’s revenue to fall to 82.3% of total revenue in FY17 (FY16: 87.1%).

We expect this proportion to further drop to 74.5% in FY18 as JMLA continues to ramp up production. Consequently, with both AASP and JMLA commanding much lower GPM compared to AEP segment, we expect overall GPM to fall to the range of 26-27% over the next two years. That said, we believe it remains crucial to closely monitor the ramp up of Midas’ JMLA business.

Slightly higher FV of S$0.255

While we factor in further share dilution given that Midas is expected to issue an additional 271.3m new shares relating to its AASP acquisition (earn-out), we maintain HOLD with a slightly higher FV of S$0.255 (prev: S$0.245) as we introduce our FY18 forecasts and roll-forward to 0.6x FY17F P/B.

Source: OCBC Research - 1 Mar 2017