• OM Holdings Ltd (OMH) 1HFY23’s core net profit of USD12.2mn (YoY: - 75.3%) was below our in-house and consensus estimates which accounting only 17.1% and 37.7% of the full year forecast. This was primary due to lower average selling prices for ore and alloys amidst decline in sales volume. Looking into 2H2023, we anticipate the decline in prices to persist due to ongoing global headwinds and weakened demand for metals. Nonetheless, OMH's strategic move towards expansion into silicon metal is expected to propel growth in the long run, through diversification to offer value added products. Maintain a BUY call at a lower TP of RM2.11 (from RM2.71). Our valuation implies an average peers PE of 8.7x and FY24F EPS of 24.3 sen.

• Below expectations. OMH’s 1HFY23 core profit of USD12.2mn (YoY: - 66.3%) below our and consensus’ expectations, accounting for only 17.1% and 37.7% of the full year forecast. The deviation against ours was mainly due to weaker-than-expected average selling prices of ferroalloys.

• Dividend. No dividend was declared during the period under review.

• YoY. Revenue and PBT declined by 31.5%YoY and 62.9% YoY to USD319.7mn USD30.5mn and respectively, no thanks to lower average selling price for ferroalloys. During this period, production of ferrosilicon (FeSi) decline by 13.5% YoY. Nonetheless, manganese alloys (Mn alloys) production was inched up by 1.3% YoY driven by increase in furnace operations, rising from 6 to 8 units, following the completion of major maintenance works. On average, both FeSi and Mn alloys were traded c. USD1,561 and USD1,035 during 1HFY23.

• Outlook. Looking into 2H2023, we anticipate the decline in prices to persist due to ongoing global headwinds and weakened demand for metals. These challenging circumstances create uncertainties and obstacles for the ferroalloy industry, making the outlook uncertain, in our view. Average selling prices for ferroalloys is expected to normalise further amidst elevated inventory. Nonetheless, OMH's strategic move towards expansion into silicon metal is expected to propel growth in the long run, through diversification to offer value added products. All in all, we favour OMH due i) competitive advantage as a low-cost ferroalloy smelter players compared to its peer, ii) extended capacity growth and diversified products mix, and iii) enviable ESG standing given their exposure to clean energy resource. Above all, OMH is expected to benefit from rapid industry consolidation and is expected to outshine due to their competitive and low-cost structure.

• Forecast. In view of the weak ASP, we cut FY23-25F earnings forecast by 47.2-50.9% to USD35.1-52.5mn as we lowered down our ASP and margin assumption.

• Our call. Maintain a BUY call for OMH with lower TP of RM2.11 (RM2.71 previously). Our valuation now is based on average peers PE of 8.7x and FY24F EPS of 24.3 sen.

Source: BIMB Securities Research - 29 Aug 2023