This article was recently published on www.nracapital.com and is reproduced with permission
Midas Holdings - worth Keeping in View despite the more than 50% rise since the middle of 2012........some snippets from my meeting with management
THE CHART above of Midas tells an interesting story. The shares have fallen from a high of around the S$1.20 level to the S$0.28.
Contributing to this decline were two important macro events:
a) the removal of Liu Zhijun as rail minister in China in Q1-2011 on alleged charges of corruption
b) a high speed train crash in July 2011 which left more than 35 people dead.
These two events led to a freeze in new high speed train contracts which in turn led to a collapse in profits for Midas in 2012.
For the half year to June 30, 2012, Midas reported net profit of RMB16.9mn down 86% from the same period in 2011 of RMB123mn. Revenue over the same period fell 26.2% to RMB450mn.
Q2-2012 is probably the low point for Midas with Q2-2012 net profit coming in at RMB1.59mn down 97.5% from RMB62.9mn in Q2-2011.
What factors contributed to the 50% rise in Midas' share price since the middle of 2012 ?
Midas has announced 3 contracts since the middle of 2012:
a) 14 August 2012 - Midas JV company Nanjing SR Puzhen Rail wins two contracts worth RMB1.4bn - Midas has a 32% stake in this JV
b) 3 September 2012 - Midas JV company Nanjing SP Puzhen Rail secures RMB588mn inter-city rail project
c) 5 September 2012 - Midas' subsidiary Jilin Midas Aluminium Industries secures RMB123.4mn contract for aluminimum alloy tubing.
These contracts are not what I am looking for - they are mainly municipal contracts and should create a base line of revenue and profit of about RMB800mn to RMB1bn and profit of about RMB$70-90mn.
But 2012 numbers will be lower than this - I estimate about RMB30-40mn because of the very weak Q2 2012 figure.
Worth keeping a close watch on Midas ! - could retrace old highs again !!!???
Nothwithstanding the poor earnings outlook for Midas in 2012 - the shares are worth keeping an eye and if certain events happen - we could see a retracement above the S$1.00 level.
The catalyst for Midas is political. The business has slowed down because there are no new high speed train contracts but China is only halfway through its 2020 target.
What will trigger contracts being issued again?
This is expected to occur after the Communist Party's 18th Congress Meeting on 8 November 2012. At this meeting the rail ministry which used to be run quite independently with military backers is expected to be subsumed under the Ministry of Transport.
The second factor is financing for the rail ministry to issue contracts is now in place.
So post the Communist Party's 18th meeting - we could see the rail ministry issuing high speed contracts again.
This will be good for Midas and could see its order book swell and also its profits rebound leading to a rebound in its share price.......
WATCH OUT for these events in the rests of 2012. Once they start winning new high speed contracts - I can put Midas back into My Stock Picks list......but as of now its speculative.....hence this note.
Barring the award of new high speed train contracts, Midas has a decent base load of municipal contracts - this should provide some share price support at the S$0.40.
So while we are waiting for the China Rail Ministry to award contracts, we can look to accumulate Midas shares at the S$0.40 level and below for an earnings recovery in 2013.