Summary

• Below expectations. OMH has released its results and its core net profit stood at USD19.1m for the 1H23 and it is below our estimation, accounting to only 27% of our forecast of USD70.7m. However, it is within consensus estimate of 48%. Key deviations were due to (i) lower than expected ASP of ore and alloys in 1H23.

• HoH. As compared to 2H22, core net profit rose marginally by 3% to USD19.1, as operating costs were significantly lower amid a drop in admin expenses and distribution costs, but was offset by higher tax expense for the period.

• YoY. Meanwhile, the core net profit dropped 61% YoY mainly driven by the decline in transacted prices of manganese ores and ferroalloys, despite similar total volumes of ores and alloys traded. The ASP was significantly lower as compared to 1H22 due to the high prices in 1H22, due to strong global recovery from the postCovid-19 pandemic environment as well as the uncertainty caused by the conflict between Ukraine and Russia. However, the impact has subsided throughout 2H22 and the situation has carried forward into 1H23.

• Outlook. As both the FeSi and SiMn prices have not normalized at this juncture, the ASP trend may continue to weaken into 2H23. However, given the distribution costs and administrative expenses for 1H23 have declined and stabilised, the core earnings may stay flattish at least for 2H23. On a brighter note, the de-stocking activities recently may likely to provide some cushion to the declining prices before seeing stability towards end-2023.

• Planned production of Metalic Silicon (MetSi) to resume in early 2024. Following the suspension of MetSi furnace, we anticipate the resumption of operations to take place sometime in January 2024. Towards end of the year, OMH plans to operate 15-16 furnaces (5-7 FeSi furnaces, 5-8 Mn Alloys furnaces and 1 MetSi furnce). This is expected to boost production output to 340,000-400,000 tonnes for FY23f.

Valuation & Recommendation

• Given the core net profit came in below expectations, we slashed our earnings by - 35-42% to USD40.5m, USD46.3m and USD54.9m, respectively for FY23-25f taking into account softer ASP of FeSi and SiMn.

• Meanwhile, we maintain our BUY recommendation on OMH, with a reduced target price at RM1.92 (-33% from RM2.86) and the target price is derived by assigning targeted P/E multiple of 7.0x to mid-FY24f 27.4 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 - 29 Aug 2023