We sense that OMH is cautious on the outlook for product prices given the economic challenges in China. It is resorting to optimising its product mix and inputs to maximise returns, such as switching to the production of ferrosilicon (FeSi) which fetches better prices, from metallic silicon (MetSi). We maintain our forecasts, TP of RM2.07 and OUTPERFORM call.

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

1. We sense that OMH is cautious on the outlook for product prices given the economic challenges in China. Recall, a significantly lower average selling price (ASP) YoY in 1HFY23 led to a 31% decline in its revenue. Adding salt to the wound, the cost of its inputs did not drop as much, resulting in its gross profit margin shrinking to 21.4% from 27.7% while net profit plunged by 61%.

2. Amidst the challenging price outlook, OMH is resorting to optimising its product mix and inputs to maximise returns. A case in point is it has temporarily suspended the production of MetSi and using the furnace to produce FeSi which fetches better prices and margins over manganese alloy (Mn alloy).

3. 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, currently under major maintenance, will be restarted sooner than expected. This is in-line with our assumption of 377MT. Overall, FY23 production base case is at similar levels to FY22.

4. Its gearing inched up to 0.72x as at end-1HFY23 from 0.63x as at end-FY22 (see chart on next page) as it drew down on revolving credit facilities and utilized more trade financing facilities. However, we are unperturbed as the nature of its business is inherently capital intensive and historically the ratio had exceeded 1x before (see chart on next page).

Forecasts. Maintained as we keep our FeSi and Mn alloy ASP assumptions unchanged at USD1,500-1,350/MT and USD900-950/MT for FY23-24.

We also maintain our TP of RM2.07 based on 6x FY24F 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 range of its international peers of 6.7x (see next page).

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. 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 alloy prices, (ii) an escalation of raw material prices, and (iii) major plant disruptions/closures.

Source: Kenanga Research - 7 Sept 2023