Midas recorded a net loss of S$6.5m in 3Q12, compared with PATMI of S$27.4m  a  year  ago.  This  was  on  the  back  of  a  21.8%  YoY  decline  in  revenue,  coupled  with  higher  operating  expenses  and  a  near-two-fold  increase  in  the  loss  from  associate.  Revenue  decline  was  due  to  fewer  orders  being  delivered  during  the  quarter.  Operations  are  likely  to  start  recovering  from  FY13,  supported  by  the  Chinese government's plans to boost investment in railway infrastructure and that  some  contracts  are  due  to  be  delivered  from  FY13.  While  we  had  expected  a  weak  3Q,  the  operating  expenses  incurred  were  higher  than  expected.  Hence,  we  have  tweaked  our  FY12  forecasts  to  account  for  the  higher  expenses.  Maintain BUY with TP of S$0.50, based on 1.0x FY13F P/B.

FY13 likely to be better. As expected, 3Q12 was weaker YoY and the same can  be  expected  of  4Q12.  The  Chinese  government  has  committed  to increasing  its  spending on China's railway infrastructure. There is no indication on when  new  contracts would be open for tender, but we note the potential for Midas to grow its  orders. Given NPRT's contract wins YTD with deliveries between 2013 and 2015,  NPRT should be able to record profits in FY13, versus a loss in FY12. This would  contribute to Midas' earnings growth in FY13.

Higher  interest  costs  dragged  down  earnings.  Midas  currently  has  a  net  gearing  of  23.7%  as  at  end  3Q12,  from  a  net  cash  position  two  years  back.  Its  finance  costs  rose  by  62%  YoY,  in  line  with  the  increase  in  bank  borrowings.  While Midas does not have a target gearing level, management indicated that it is  considering alternative financing options to lower its finance costs.

Lower  FY12  estimates,  maintain  FY13.  As  Midas  expands  its  production  capacity,  cost  of  sales  especially  depreciation,  is  expected  to  remain  high.  This  would  continue  to  place  pressure  on  its  margins.  With  higher  than  expected  expenses  in  3Q12,  we  have  lowered  our  FY12  estimates.  Given  the  potential  order  flows  that  it  could  secure,  we  think  Midas  should  trade  higher  than  its  current 0.75x P/B. Hence, we are maintaining our TP of S$0.50, pegged to 1.0x  FY13F P/B.

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Source: OSK