We initiate coverage on OMH with an OUTPERFORM call and TP of RM2.54. OMH is the largest manganese and silicon smelter in Southeast Asia. Its main ferroalloy smelting plant in Samalaju, powered by Bakun hydroelectric plant, has the lowest cost structure in the region and is highly environmentally friendly. OMH’s fortunes are tied to global steel demand which is projected by World Steel Association to grow by 2.2% in 2023. We expect OMH’s FY22F/FY23F earnings to surpass that of FY21 driven by capacity expansion and elevated ASP.

A vertical integrated manganese ore and ferroalloy player. Primarily listed on the Australia Stock Exchange with a secondary listing on Bursa Malaysia’s Main Market, OM Holdings Ltd (OMH) is the largest manganese and silicon smelter in Southeast Asia. It has two smelters, namely OM Sarawak (OMS) in Samalaju, Sarawak and OM Qinzhou (OMQ) in Qinzhou, China. Meanwhile, its 100%-owned Bootu Creek Mine in Australia had ceased operations last Dec while it also has an effective 13% interest in the Tshipi Borwa Mine in South Africa.

Low-cost ferroalloy smelter. OHM has a huge cost advantage over its international peers given the long-term hydropower supply contract with Bakun Dam entered into at competitive rates while its peers especially European smelters face high electricity costs as fuel prices surge. Besides competitive labour cost, OMH also benefits from logistical advantages such as exporting its ferrosilicon (FeSi) product to Japan. We understand that OMH’s current cash cost for FeSi is c.USD1,200- 1,400 per MT against market price of c.USD1,600 (CIF Japan).

Capacity expansion to drive volume growth. Ever since the pandemic, OMH had OMQ stopping production since last Dec as skyrocketing power-tariffs have rendered operation unviable while OMS is undertaking conversion and major maintenance of existing furnaces. By this year end, total plant output will be 340,000-360,000 MTPA as opposed to 470,000 MTPA pre-COVID. With four more conversion and two new furnaces on the pipeline, this will raise total capacity to 610,000- 640,000 MTPA which helps to drive future volume growth.

ASP came off peak, but to remain elevated. The skyrocketing power cost has led to some European smelters cutting production as their cash cost is higher than spot prices while strict environmental requirement have forced some Chinese smelters to shut down production. This will continue to keep FeSi and manganese alloys (Mn Alloys) prices elevated given supply-demand imbalance, which will benefit OMH due to its low energy cost. Besides, low carbon smelter OMS makes it a good spot for ESG initiative.

Positive volume and ASP outlook. We expect FY22F net profit to jump 53% YoY attributable to better ASP mix and operation efficiency, despite a 10% contraction in revenue due to cessation of OMQ and Bootu Creek Mine, but FY23F net profit is forecasted to fall 8% YoY on the back of 13% decline in revenue as ASP falls. Nonetheless, higher production volume of 16% will help to mitigate the fall in ASP. Meanwhile, the strong ASP in the past two years have helped to strengthen its balance sheet, with net gearing set to improve to 0.30x by FY23 from 2.09x five years ago in FY17A.

Initiating coverage with an OUTPERFORM and TP of RM2.54 based on FY23F prospective PER of 5x which is line with its international peers’ average. There is no adjustment to our TP based on ESG which is given a 3-star rating as appraised by us (see Page 7).

Source: Kenanga Research - 26 Oct 2022