• OMH’s production volume for 4Q23 showed improvement, as 14 out of a total of 16 furnaces were operational.

• We deemed FeSi production aligned with our in-house forecast, while Mn alloys production exceeded our initial projection, accounting for 99.7% and 113.2%, respectively.

• 1 FeSi furnace has undergone hot commissioning, while another Mn alloys furnace's hot commissioning has been extended due to it not performing as per contract requirements.

• Despite facing challenges, OMH's promising future is underpinned by its strategic diversification into the silicon metal market. This move positions the company to capitalize on emerging opportunities in the growing renewable energy sector, ensuring a sustained competitive advantage.

• No change to our FY23-FY25F earnings forecast pending the result announcement.

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

4Q23 production and sales volume update

Ferrosilicon (FeSi) production showed a 3.4% QoQ improvement and an 18.4% YoY increase. Conversely, manganese alloys (Mn alloys) experienced a 2.7% QoQ decline but surged by 103.8% YoY. In terms of sales volume, both FeSi and Mn alloys demonstrated remarkable growth, with FeSi increasing by 26.2% QoQ and 104.3% YoY, while Mn alloys showing a substantial increase of 68.1% QoQ and 215.3% YoY. Looking at the full-year FY23 results, FeSi production experienced a marginal decline of 0.6% YoY, while Mn alloys production showed a significant jump of 35.8% YoY. In sales volume, FeSi declined by 7.6% YoY, whereas Mn alloys recorded a substantial increase of 34.2% YoY. We considered FeSi production to be within our in-house projection, while Mn alloys surpassed our expectations, reaching 99.7% and 113.2%, respectively. Notably, the robust demand for OMH products was primarily driven by the South East Asia market, along with strong markets in Japan and South Korea.

Furnace Utilisation Strategies and Project Progress

As of the end of FY23, comprehensive maintenance was successfully completed for 14 out of 16 furnaces. Among these, 12 furnaces have not only undergone hot commissioning but also successfully passed performance testing. Currently, 1 FeSi furnace is undergoing hot commissioning, while the hot commissioning for 1 Mn alloys furnace has been delayed due to non-compliance with contractual requirements. The remaining 2 FeSi furnaces are scheduled to commence major maintenance activities in FY25. Management has communicated their goal to operate at least 14-15 furnaces at maximum capacity for FY24.

Metallic silicon progression update

The on-site delivery of fabricated equipment for the metallic silicon (MetSi) conversion project has taken place, and replacement works commenced in mid-January 2024, with a targeted completion date set for the end of February 2024. Meanwhile, both MetSi furnaces are temporarily producing FeSi to optimize furnace utilization.

Earnings Estimate

No change to our FY23-FY25F earnings forecast pending upcoming result announcement.

Reiterate BUY at TP of RM2.11

Maintain a BUY call for OMH with unchanged TP of RM2.11. Our valuation is based on average peers PER of 8.7x and OMH’s FY24F EPS of 24.3 sen. We believe the total return is remained attractive and this will be powered by OMH 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.

Source: BIMB Securities Research - 2 Feb 2024