While most shares benefited from the Bull Run in 2017, with the Straits Times Index rising by 18.7 percent, the shares of Midas Holdings (Midas) fell over 60 percent to an all-time low of $0.092 in December 2017. This was on the back of news that there will be an extension of maturity date of its US$30 million notes to 23 November 2018, which will further restrict the company’s assets and increase its obligations.
Surprisingly, Midas started off in 2018 with a bang as its share price skyrocketed by 66.7 percent, jumping from $0.108 to $0.18 due to an announcement that its 32.5 percent owned joint venture, CRRC Nanjing Puzhen Rail Transport (NPRT) has won three metro train car supply contracts worth Rmb2.7 billion in China. In addition, its Average Trading Volume (ATV) for the past 10 days was nearly six-fold more than it’s ATV for the past three months, sparking investors’ interest.
Backed by strong financial performance in 9M17, revenue rose by 24.2 percent to Rmb1.4 billion largely due to newly included Aluminum Alloy Stretched Plates segment of Rmb297 million. Gross profit increased by 32.2 percent to Rmb400 million while gross profit margin increased by 1.8 percent to 29.3 percent. Ultimately, net profit surged by 111.3 percent to Rmb108 million.
Bearing in mind its primary revenue contributor, Aluminum Alloy Extruded Products, received higher revenue contributions from transport industry of 91.4 percent in 3Q17 compared to 78.5 percent in 1Q17. Demand for infrastructure development and materials remain high since China’s Belt and Road Initiative is still ongoing.
The three contracts awarded to NPRT will bring its total order book to Rmb16 billion, driving higher earnings in FY19 and FY20 upon delivery of the metro trains. This will substantially increase profits by NPRT contributing to Midas’ Income statement, lifting Midas’ bottom-line.
Based on current share price of $0.17, Midas is trading at a trailing 12-months price-to-earnings of about 11.7 times. Compared to its competitor, China Zhongwang Holdings that is trading at about 8.8 times, Midas is perceived as overvalued.
Investors should take note that Midas’ profitability is heavily reliant on rail transport industry. Despite that, we believe the positive announcement at the beginning of the year is a further testament to investors, in the company’s ability to secure more contracts.
Furthermore, given that profits are expected to grow due to the enlarged order book, this stock warrants an even closer look.