Summary

• OM Holdings Ltd’s (OMH) FY22 net profit rose 10.3% YoY to USD67.8m, driven by the higher transacted prices of manganese ores and ferroalloys. Revenue for the year gained 9.8% YoY to USD856.6m.

• The reported earnings came below expectations, making up to 80.7% of our forecasted net profit of RM84.0m and 85.8% of consensus net profit of RM79.0m. The variance is mainly due to the normalization of FeSi and Mn alloy prices during 2HFY22, amid the uncertainty of ferroalloy supply that was rattled by the geopolitical tension between Ukraine and Russia.

• As at 31st December 2022, OMH operates 10 out of 16 furnaces, with 5 furnaces producing FeSi, 4 furnaces producing Mn alloys and 1 furnace producing silicon metal. Meanwhile, the remaining 6 furnaces were shut for major maintenance.

• We gather that production volumes for FeSi rose 3.6% to 71,426 tonnes in 2H22 vs. 68929 tonnes in 1H22. Cumulatively 140,355 tonnes make up to 93.6% of our assumption of 150,000 tonnes. On the other hand, production volumes of Mn alloys fell 21.3% to 95,506 tonnes in 2H22 vs. 121,307 tonnes in 1H22. The decline was due to 4 manganese alloy furnaces were shut down in stages for major maintenance works in 4Q22. We expect production to tick slightly lower in 2023 with FeSi at 125,000 tonnes and Mn alloys at 210,000 tonnes due to the conversion progress of 2 furnaces to produce MetSi.

• Raw material prices wise, 44.0% Mn ore price rose 16.3% QoQ to USD5.13/dmtu CIF China, boosted by the higher demand from smelters. FeSi price increased marginally by 0.6% QoQ to USD1,630/mt CIF Japan. Meanwhile, SiMn price fell marginally by 1.0% QoQ to USD1,030/mt CIF Japan. With energy prices turning softer in recent quarters and the recovery in economic activities, we reckon that raw material prices may remain flat over the foreseeable future.

• With the easing of port congestion and increasing freight supply, freight rates continue to normalised in 4Q22 to USD0.79/dmtu from South Africa to China for 37.0% manganese ore vs. USD0.97/dmtu in 3Q22. Still, we reckon that freight prices may hover above pre-Covid19 pandemic levels, due to the on-going geopolitical tension between Russia and Ukraine as well as higher labour cost.

Valuation & Recommendation

• Despite the weaker-than-expected results, we made no changes to our earnings forecast for subsequent years as we reckon that ASP has now demonstrating signs of stability, while net margins may stay at high single digits. Therefore, we maintain our BUY recommendation on OMH, with an unchanged target price of RM2.86.

• We derive our target price by assigning targeted P/E multiple of 7.0x to FY23f EPS of 40.9 sen. The assigned target P/E represents a slight discount to the average of 9.0x 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 Feb 2023