Midas’ momentum to rebound with back-to-back contract wins

NPRT’s low-floor tram contract win is a catalyst.

According to CIMB, it gets positive signals from Midas’s associate NPRT’s latest low-floor tram contract win. This lends credence to its expectations of positive order flow momentum and could signify back-to-back contract win announcements and further re-rating potential. 

Here’s more:

This contract win is within our expectations and we maintain our estimates. Midas’s recent run-up resembles the price trajectory seen in 2009, before it won back-to-back contracts. This reflects resurrected investor confidence in Midas.

Thus, we deem it appropriate to raise our P/E peg to 17.5x CY14 EPS (five-year forward average) from 15.5x. We raise our P/E-based target price and maintain Outperform.

What Happened: Midas’s 32.5%-owned associate NPRT won its first 100% low-floor tram contract from Suzhou New District Tramway valued at Rmb338m for the Suzhou National New & Hi-tech Industrial Development Zone Tramline 1, a light rail line currently under construction. Delivery will take place in 2014. This contract adds to NPRT’s orderbook of Rmb9bn.

What We Think: We believe the latest contract win reflects strong order flow momentum for the railway industry. While we have yet to see a major high-speed railway contract awarded, Midas recently outperformed on market’s anticipation of potential contract wins.

As mentioned in our 6 Dec note (Regaining the Midas touch), our checks with management suggest that order momentum on the ground is gradually picking up with major clients restarting negotiations with key suppliers. Coupled with fixed asset investments picking up in China and an 18-month hiatus in high-speed railway contracts, we believe the writing is already on the wall.

What You Should Do: Despite its recent outperformance, we continue to see upside for Midas. We will not be surprised to see valuations re-rating above our 17.5x target. Midas is currently trading at 14.7x rolling P/E. In its heydays of 2009 and 2010, Midas showed its ability to hit valuations higher than 28.6x, 1 sd above its five-year forward mean. We see key catalysts from major high speed railway contract wins.