Kenanga Research & Investment

OM Holdings - Paring Down Stake in Chinese Smelter

Publish date: Thu, 02 Nov 2023, 10:47 AM

We are positive on OMH’s latest move to pare down its stake in its smelter in China by 90% (to 10%) for RM119m, as the smelter has been idle for almost two years. The new shareholder will inject capital to restart the unit’s operation while OMH will handle raw material procurement and marketing. We maintain our forecasts, TP of RM2.07 and OUTPERFORM call.

OMH is selling a 90% stake in OM Material (Qinzhou) Co Ltd (OMQ) to Beijing Kunpeng Hongsheng Metal Co Ltd (BKHM) for RMB182.6m (c.USD25m or RM119m). OMH will still retain a 10% interest in the Chinese unit. BKHM is an established company involved in the trading of ores and manganese alloys in China. The exercise is expected to be completed by 30 Nov 2023.

We are positive on this latest development. Firstly, we estimate that OMH will book in USD18m (RM86m or 12.0 sen/share) gains from the disposal while the proceeds could be redeployed to OMH’s core business operations in Sarawak as the Samalaju plant is in the midst of the silicon metal conversion project. The proceeds will reduce OMH’s net debt and net gearing of USD229.5m and 0.57x as at end-Jun 2023 to USD204.5m and 0.51x, respectively.

Secondly, the new controlling shareholder of OMQ will restart its operation (which has been curtailed since Dec 2021 due to skyrocketing energy cost). We understand that BKHM will inject additional capital to refurbish the smelting plant while OMH will assist in the procurement of raw materials and product marketing. In addition, OMH could leverage on BKHM to broaden its market reach in China.

Forecasts. Maintained as OMQ does not contribute to OMH’s earnings.

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 7.2x (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 - 2 Nov 2023

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