OMH is positioned to capitalise on the economic recovery in China. It has completed its furnace conversion to produce high margin product i.e., metallic silicon. Also, it has the flexibility in terms of timing for maintenance works (depending on product demand). With China’s reopening coupled with supply constraints in Europe, ASPs are set to recover in 2023 after a lacklustre 2H 2022. We maintain our forecasts but raise our TP by 20% to RM3.05 (from RM2.54) based on a higher PE multiple. Maintain OUTPERFORM.

We hosted a conference call between OMH and our clients yesterday. The key takeaways are as follows:

1. Furnaces conversion completed. By the end of 2022, OMH had completed two idle ferrosilicon (FeSi) furnaces to manganese alloys (Mn Alloys) and two others idle FeSi furnaces to metallic silicon (MetSi) furnaces. First MetSi furnace is currently undergoing hot commissioning and performance testing. The commercial commissioning of MetSi is likely to be in 2QFY23. Although installed capacity for MetSi furnace (30-35MT/day) is half that of FeSi furnace (65-70MT/day), the net production economics is expected to be same as MetSi fetches far better margin than FeSi, according to OMH based on their observation of its Chinese peers.

2. Plant utilisation to maintain at 75%. In 2022, overall plant utilisation at OM Sarawak is 75% as four Mn Alloys furnaces were undergoing major maintenance coupled with the abovementioned MetSi conversion. Going into 2023, the company expects the utilisation rate to maintain around the same as eight furnaces will undergo major maintenance in phases throughout the year. However, production should improve as skilled workers from China are expected to arrive soon after China’s border reopened. Meanwhile, the company also said should ASP spike up, it would delay the maintenance work so that it is able to capture the benefit of high ASP.

3. Product prices to improve. After enjoying a solid price rally in 1HFY22 due to Russia-Ukraine war-led power crisis, product prices have fallen since then in 2HFY22 and stagnated for the past four months. This could signal that prices are bottoming. In 2HFY22, prices of FeSi and silicomanganese (SiMn) fell 20% and 31%, respectively, to average of USD1,682/MT and USD1,063/MT from USD2,112/MT and USD1,545/MT in 1HFY22. With China’s reopening, demand should pick up further helping to bring ASP higher while higher Chinese costs on strengthening CNY should support FeSi price while destocking exercise likely to keep SiMn price elevated.

We maintain our FY22F earnings (results due out by the end of the month) which we believe have adequately reflected a weak 2HFY22 given the weak sales on a double-whammy of a weak volume and ASP. Our FY22F earnings imply for its 2HFY22 bottomline to decline by 12% to c.USD43m from USD49.3m in 1HFY22. Similarly, we maintain our FY23F net profit.

We continue to like OMH for: (i) its structural cost advantage over its international peers given its access to low-cost hydro-power under a 20-year contract ending 2033, (ii) its strong growth prospects underpinned by plans to expand its capacity by 30%-36% to 610,000- 640,000 metric tonnes per annum over the medium term, and (iii) its appeal to investor given its clean energy source.

We raise our TP by 20% to RM3.05 (from RM2.54) as we now value OMH at 6x FY23F PER (vs. 5x previously) to bring our valuation for OMH more in-line with the increased valuation average of its international peers of 6.4x (see below) following the run-up in their share prices on China’s reopening. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our recommendation include: (i) a global recession resulting in a sharp fall in the demand for steel, hurting FeSi and Mn alloys prices, (ii) an escalation of raw material prices, and (iii) major plant disruptions/closure.

Source: Kenanga Research - 3 Feb 2023