Summary

• OM Holdings Ltd (OMH)’s 100.0% owned subsidiary, OM Materials (S) Pte Ltd has entered into a binding letter of offer with Salamaju Industries Sdn Bhd (SISB) for the latter to sell all its shares held in OM Materials (Sarawak) Sdn Bhd (OM Sarawak).

• OM Sarawak owns and operates a ferrosilicon and manganese alloy smelter in Sarawak, East Malaysia equipped with 16 units of 25.5 MVA furnaces that has an annual production capacity of approximately 200,000-210,000 MT of ferrosilicon (FeSi) and approximately 250,000-300,000 MT of manganese alloy (Mn alloy). The plant also consists of a sinter plant that has a design capacity to produce 250,000MT of sinter ore per annum.

• The acquisition that entails 165.6m ordinary shares (25.0% of issued and paid-up capital of OM Sarawak) and 43.7m of irredeemable convertible preference shares in OM Sarawak as well as 32.1m ordinary shares in OM Samalaju is for a total consideration of USD 120.0m. The acquisition will be funded through a combination of existing cash reserves (AUD112.3m as of 31st December 2021), future operating cash flows, and/or bank borrowings, and/or equity raising in 2H22. We reckon that there is still room to leverage onto external borrowings to finance the deal as net gearing level is only 0.5x as of 31st December 2021.

• We understand the OMH currently owns an effective 75.0% stake in OM Sarawak as well as OM Salamaju. Upon completion of the abovementioned deal, both OM Sarawak and OM Salamaju would be a wholly-owned subsidiary of OMH. Consequently, we expect bottom line to be beef up by additional earnings contribution of approximately RM25.0-30.0m per annum (assuming Fesi and Mn alloy prices stays at current levels) through an assumed debt-to-equity funding of 70:30 ratio.

• We are sanguine on the deal as the move will cement OMH position as one of the largest vertically integrated manganese ore and ferroalloy player in South East Asia market that is operating as the world’s low-cost quartile smelter. The move that would be earnings accretive over the long run would benefit OMH that is tapping into the rising demand for building material products alongside with leveraging into the soaring raw material prices.

• Moving forward, OMH remains committed on their expansion plans to convert 2 ferrosilicon furnaces to produce manganese alloy that is already in progress. With the gradual arrival of Chinese contractors since December 2021, we expect the conversion process to see no major hiccups and is on track be commissioned in 3Q22.

• In the meantime, plans to convert 2 ferrosilicon furnaces into production of silicon metal is also underway with the hot commissioning and testing works expected to take place in December 2022. Silicon metal typically yields better margins will enable OMH to tap into other industries such as the aluminum, chemicals and solar.

Valuation & Recommendation

• Following the acquisition, we raised our earnings forecast by 4.4%-10.1% to RM286.7m, RM329.2m and RM348.9m for FY22f, FY23f and FY24f respectively to reflect the additional contribution from 25.0% equity stake in OM Sarawak and OM Salamaju. Consequently, we maintained our BUY recommendation on OMH with a higher target price of RM4.01.

• We derive our target price by assigning targeted P/E multiple of 9.0x to its revised FY23f EPS of 44.6 sen. The assigned target P/E represents a slight discount to the average of 10.8x of selected mining and smelting companies listed on Bursa Malaysia as well as international scale. The discount is premised to OMH smaller market capitalisation.

• Risks to our recommendation and target price include weaker-than-expected production and ferroalloy prices. OMH is also exposed to currency risk, whereby a weaker USD against the ringgit would be a drawback and vice versa.

Source: Mplus Research - 6 May 2022