Midas Holdings – Company Update (James KOH, DID: 64321431)

Previous Day Closing price: $0.635

Recommendation: BUY

Target price: $0.82

Considering a fourth production line

In an interview with Business Times recently, management highlighted that it is considering building a fourth production line as it bids for more rail contracts in China. We believe this would be dependant on overall contract order flow as well as the utilisation rate for its third production line once it is ready by 1st quarter 2010.

Could boost capacity by a further 33%

A fourth production line would probably add 10,000 tonnes or 33% to the existing 30,000 tonnes/ annum (including third line) capacity. However, we believe any concrete plans for this would only materialize after the third line is up and running. This means the earliest completion date would likely be in 2H2011, taking into account previous expansions.

Preliminary estimates of profit contribution

We have not factored this into our forecasts, but our preliminary estimates suggest this could potentially add around $60million in revenue and $13million in net profits once it is fully operational. We also believe such a line would involve capital expenditure of around $40million which can be funded by a combination of cash and debt.

Targeting $200m worth of contracts

Management is currently chasing $200m worth of contracts to supply aluminium alloy profiles for use in the manufacturing of high-speed and metro trains in China. This includes projects such as the Beijing-Shanghai high-speed railway line and metro projects in Shanghai, Hangzhou, Guangzhou and Xi’an.

New contract announcements likely as 3rd line completes

We believe the probability of new contract announcements will increase as the third production line comes onstream. Customers are unlikely to commit new orders without the production capacity in place. Furthermore, we note that the third line is for a different profile size from existing lines and customers may require some trial sample. Our target price and forecasts remain unchanged.