OMH’s 1HFY23 results met expectations. Its 1HFY23 net profit plunged 61% YoY on weaker sales volume and ASP. We expect higher production in FY23 on shorter maintenance days but its ASP will remain soft on a weak global steel sector. We maintain our forecasts, TP of RM2.07 and our OUTPERFORM call as the stock offers value at the current level.

OMH’s 1HFY23 net profit of USD19.1m met expectations at 55% and 48% of our full-year forecast and the full-year consensus estimate, respectively. No dividend was declared during 1HFY23 as expected.

YoY. Its 1HFY23 revenue contracted 31% to USD319.7m owing to a sharp declined in realised average selling price (ASP) while sales volumes were slightly lower. S&P Platts data showed that ferrosilicon (FeSi) spot price plunged 26% to USD1,559/MT on average in 1HFY23 from USD2,112/MT in 1HFY22 while silicomanganese (SiMn) spot price plummeted by 33% to USD1,033/MT from USD1,545/MT. Meanwhile, sales volume for ores dipped by 2% to 525.1 MT while alloys volume traded flattish at 194.3 MT. Given the substantially reduced ASP, net profit tumbled 61% to USD19.1m.

QoQ, its 1HFY23 turnover similarly declined, by 18% to USD319.7m from USD389.9m in 2HFY22, on lower realised ASP as well as lower sales volume for alloys by 10% while ores sales volume declined 49%. S&P Platts reported lower average FeSi spot price, by 7% to USD1,559/MT from USD1,682/MT while SiMn spot price dipped 3% to USD1,033/MT from USD1,063/MT. However, it managed to post higher net profit by 3% which we believe could be due to a better product margin dynamic (between selling price and input cost). Hence operating margin improved to 12% from 7% previously.

Outlook. Its FY23 production volume is expected to be higher YoY on shorter maintenance days but its ASP will remain weak on subdued demand from the steel sector.

Forecasts. Maintained.

We also maintain our TP of RM2.07 based on 6x FY24 PER plus a 5% premium by virtue of its 4-star ESG rating as appraised by us (see Page 5). The valuation is within the within the range of its international peers of 6.6x (see Page 3).

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. Maintain OUTPERFORM as the stock offers value at the current level.

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 - 29 Aug 2023