OMH’s FY22 results disappointed due to lower ASP and sales volume in 2HFY22. Despite ASP looking set to rise on China’s reopening coupled with supply constraints in Europe, we cut our FY23F earnings forecast by 8%, our TP by 3% to RM2.95 (from RM3.05), but maintain our OUTPERFORM call.

FY22 net profit of USD67.8m missed our forecast and consensus estimate by 27% and 9% respectively. The main variance against our forecast came from a weaker-than-expected ASP and sales volume in 2HFY22. A final NDPS of AUD0.015 was declared in FY22 (record date: 05 May; payment date: 26 May) while there was no dividend in FY21.

YoY. FY22 net profit rose 10% to USD67.8m from USD61.5m on the back of 10% hike in revenue given better realised ASP as well as higher production volume. Its ferrosilicon (FeSi) sold volume grew 12% to 146,646 MT from 131,059 MT over the period but data revealed by S&P Platts showed that spot prices for FeSi and silicomanganese (SiMn) fell 9% and 10% over the year, respectively. Meanwhile, taxation was higher at USD23.0m from USD2.5m previously as the company provided higher tax charges in accordance to its second term of MIDA 5-year tax incentive which is expected to be fulfilled by 2026.

Looking at the half-yearly results, 2HFY22 net profit plunged 62% to USD18.6m from USD49.3m in 1HFY22 as revenue contracted 16%. This was largely due to lower-than-expected realised ASP as S&P Platts recorded spot prices for FeSi and SiMn plunged 20% and 31%, respectively. However, OHM sold 14% more FeSi during the period. Meanwhile, compared to the same period last year, 2HFY22 net profit contracted 61% from USD48.1m as revenue fell 10% given FeSi and SiMn spot prices declined 35%. OHM also sold 3% more FeSi from the same period last year.

Forecasts. We trim FY23F earnings by 8% to reflect FY22 actual results and revise operating costs higher by 1%. We maintain our FeSi and SiMn price assumptions of USD1,600/MT and USD1,000/MT, respectively. We also introduce FY24F number with FeSi and SiMn price assumptions of USD1,350/MT and USD950/MT, respectively. Our dividend forecasts are the same for both years at AUD0.015.

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.

Post-earnings revision, our TP is reduced by 3% to RM2.95 (from RM3.05), valuing the stock at an unchanged 6x FY23F PER (at a discount compared to its international peers’ 7.5x) plus a 5% premium by virtue of its 4-star ESG rating as appraised by us (see Page 5). Maintain OUTPERFORM.

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) escalation in the cost of key inputs such as manganese ore, quartz and semicoke, and (iii) major plant disruptions/closure.

Source: Kenanga Research - 28 Feb 2023