OMH guided for higher FY23 production volume due to shorter maintenance periods for a few furnaces. However, its ASP will remain weak on subdued demand from the steel sector. We cut FY23-24F earnings forecasts by 56%/22%, lower our TP by 30% to RM2.07 (from RM2.95) but maintain OUTPERFORM.

The key takeaways from OMH’s investor briefing yesterday are as follows:

1. It guided for a total output of 340MT-400MT in FY23 from its plant in Sarawak, vs. 320MT-370MT three months ago thanks to higher capacity utilization as more furnaces, which are under major maintenance, are expected to restart sooner than expected.

2. Its two Mn alloy furnaces and one FeSi furnace completed their major maintenance in 2HFY23 as compared to only two Mn alloy furnaces in 1QFY23. The remaining five FeSi furnaces will undergo major maintenance works in phases throughout 2HFY23. FY23 production base case is at similar levels to FY22.

3. It guided for ferrosilicon (FeSi) production volume of 120MT-140MT in FY23F (60MT in 1HFY23A) and 223MT-263MT for manganese (Mn) alloy production volume in FY23F (123MT in 1HFY23A).

4. Its metallic silicon (MetSi) production was temporarily suspended in 2QFY23 due to the furnace not performing as anticipated within the framework of the EPC contract. Instead, FeSi was temporarily produced from a MetSi furnace given better prices and margins over Mn alloy. The MetSi production is expected to restart in early 2024.

5. FeSi spot price fell 7% to USD1,559/MT on average in 1HFY23 vs. USD1,682/MT in 2HFY22 due to elevated inventory and lower input costs. Meanwhile, Mn alloy ASP also continued to decline due to a similar reason as FeSi prices have already retraced to 4QFY22 levels despite higher power price. The silicomanganese (SiMn) spot price dipped 3% to USD1,033/MT in 1HFY23 from USD1,063/MT in 2HFY22.

In view of the weak ASP and lower-than-expected Mn alloy production volume, we cut our FY23-FY24F earnings estimates by 56%-22% to USD34.6m-USD55.0m. We also reduce: (i) Mn alloy production assumption by 18%-13% to 220.8MT-254.8MT from 270MT-294MT previously; and (ii) FeSi ASP assumption to USD1,500/MT for FY23F from USD1,600/MT and Mn alloy ASP assumption to USD900/MT for FY23F from USD1,000/MT. However, we maintain our FY24 ASP assumptions for FeSi and Mn alloy unchanged at USD1,350/MT and USD950/MT respectively. We also keep our USD0.015 NDPS unchanged.

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 investors given its clean energy source.

Post-earnings revision, we reduce our TP by 30% to RM2.07 (from RM2.95) with unchanged 6x FY24F PER (rolled over from FY23F) plus a 5% premium by virtue of its 4-star ESG rating as appraised by us (see Page 5). The valuation is within the range of its international peers of 5.5x on average (see below) following the recent weakness in their share prices.

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

Source: Kenanga Research - 1 Aug 2023