Summary

• OM Holdings Ltd (OMH) has announced their 1H22 production figures that saw their Samalaju Smelting Complex recorded production output of 33,004 MT (+3.2% QoQ) of ferrosilicon (FeSi), 60,767 MT (+0.4% QoQ) of manganese alloys (Mn alloys) and 30,446 MT (+18.7% QoQ) of manganese sinter ore. Meanwhile, a total of 37,779 MT (+23.0% QoQ) of FeSi and 52,172 MT (-9.5% QoQ) of Mn alloys were sold during the quarter. The improved sales of FeSi came as the delayed shipments at the end 1Q22 was resolved.

• Over at their Australia operations, a total of 59,056 MT (-30.8% QoQ) of manganese products were exported. We note that the mine’s processing plant has ceased production since 24th January 2022. On a brighter note, a total of 422,380 MT (+4.2% QoQ) of ores and alloys were sold in 2Q22.

• Although sales improved during the quarter, we gather that the price of 44.0% Mn ore fell -6.8% QoQ to USD 7.27/dmtu CIF China, while FeSi and silicon manganese (SiMn) price declined -13.5% QoQ and -31.0% QoQ to USD 1,925/MT and USD 1,225/MT, respectively. The downward pressure in price came amid weaker demand from steel mills as China’s steel production remained in sluggish situation.

• Meanwhile, we note that OMH has successfully modified and converted 2 FeSi furnaces to produce manganese alloys with hot commissioning and performance testing on 27th June 2022 and 25th July 2022 respectively. This will boost total annual production capacity to 333,000-400,000 MT per annum of manganese alloys. In the meantime, 2 units of FeSi furnaces are still undergoing conversion works (demolition works completed and civil modification works are ongoing) that will be able to generate 21,000-24,500 MT per annum of metallic silicon (MetSi) upon completion.

• Following the quicker-than-expected change of tide in demand, we reckon that material prices, both FeSi and SiMn are expected remain unexciting over the foreseeable future (below USD2,000/MT and USD1,300/MT respectively) as the uncertainties persisted surrounding the global inflationary pressure continues to sap demand. Still, we expect improved production to provide some cushion to the falling average selling prices. Meanwhile, we note that major maintenance works at Salamaju Smelting Complex have commenced since June 2022.

Valuation & Recommendation

• Although the total production and sales came in within our expectations, we trimmed our earnings forecast by 8.0-12.5% to RM253.4m, RM299.4m and RM318.9m for FY22f-FY224f, taking into account of the downward revision in ASP. Consequently, we maintained our BUY recommendation on OMH, but with a lower target price of RM2.84.

• We derive our target price by assigning targeted P/E multiple of 7.0x to FY23f EPS of 40.6 sen. The assigned target P/E represents a slight discount to the average of 8.8x 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 - 28 Jul 2022