• OMH Holdings Limited (OMH) is a vertically integrated company  that operates in the manganese and ferroalloy industries. The  group is involved in the whole value chain from upstream activities  such as exploration and mining of manganese ore, to downstream  including smelting and trading of manganese ore and ferroalloys.

• OMH key growth drivers include: i) structural cost advantage over  global peers given its position as a low-cost quartile ferroalloy  smelter, ii) strong growth prospects banking on capacity expansion  and diversified products offering, and iii) elevated ASPs on the back  of a recovery in China’s steel industry following China’s full  economic reopening. Above all, OMH is expected to benefit from  rapid industry consolidation and OMH is expected to outshine due  to their competitive and low-cost structure.

• We forecast core net profit of USD74.6mn-USD105mn for FY23-25F  with 10.3-12.3% core net profit margin to be backed by elevated ferroalloy prices, higher output as well as capacity expansion.

• We initiate coverage on OMH with a BUY call and TP of RM2.91 derived based on 6x PER (30% discount to 1-year average peers PE  of 8.7x) that is pegged to FY24F EPS of 48.5 sen. The attractive return  is also supported by the recent share price pullback and the stock is  ripe for a rebound.

Competitive Advantage as Lowest Ferroalloy Smelter Player

OMH has a significant cost advantage over its global peers as the plant operates on renewable hydro-power through long-term hydropower  supply contract with Bakun Dam at competitive rates. This contract  provides them with a reliable and low-cost source of energy for Sarawak smelting operation, which enables them to produce ferroalloy products  at lower cost. This a clear cost advantage given many European smelters  that are facing with high electricity costs due to surging fuel prices. Note  that many European smelters rely on fossil fuels for their energy needs,  which expose them to price fluctuations. The rising fuel costs have made  it difficult for these smelters to maintain their cost competitiveness, hence potentially impact their market share and consequently,  profitability. This has triggered plants close down which drove rapid  industry consolidation.

Imbalanced Market Dynamic to Elevate Prices

Escalating power costs have led to a challenging operating environment  for some European smelters, forcing them to cut production capacity and/or shut down the plants. On the same note, strict environmental  regulations have also forced some Chinese smelters to close production.  The ongoing war between Russia-Ukraine has also been a bane which  triggered supply shortage. Note that Ukraine is the world’s second-largest manganese (Mn) alloys producer while Russia is the world’s  second biggest exporter of ferrosilicon (FeSi) in the world. These factors  have caused supply-demand imbalance for FeSi and Mn alloys, emerging as drivers to prices and hence, upside risks to earnings. China’s full  economic reopening will also buoy demand thanks to revival in their  construction activity.

Initiate with a BUY call with TP of RM2.91

We initiate coverage on OMH with a BUY recommendation and TP of RM2.91. We favour  OMH due to i) competitive advantage as low-cost ferroalloy smelter players, a significant  advantage compared to peers, ii) extended capacity growth and diversified products mix, and  iii) impressive ESG standing thanks to exposure to clean energy resources.

Background

OM Holdings Limited (OMH) started off back in 1994 and has now evolved into one of the largest vertically integrated manganese ore and ferroalloy players in South East Asia. OMH  and its subsidiaries have an established track record of over 25 years in exploration, operations and marketing and trading. With vertically integrated operations globally in  exploration, mining, smelting, sintering and marketing and trading, the group is able to  capture significant value and margins along the entire value chain. The group’s three core  businesses are comprised of exploration and mining of manganese ore, production of  manganese alloys and ferrosilicon and marketing and trading of manganese ore and  ferroalloys. Today, the group is one of the world’s major manganese ore, ferrosilicon and  manganese alloy producers with market presence and operation in Australia, China, Japan,  Malaysia and South Africa. It has dual listing in Australian Securities Exchange (ASX) and Bursa  Malaysia and this gives the group a unique exposure to the niche manganese and silicon  space essential to the modern world.

Source: BIMB Securities Research - 11 May 2023