OMH is still cautious on the price outlook for its products given the economic challenges in China as well as the oversupply situation. It guided for a higher FY23F production as its furnaces resume production ahead of schedule after the early completion of maintenance work. All its 16 furnaces will be operational by 1QFY24, including the ones producing high-margin metallic silicon (MetSi). We maintain our forecasts, TP of RM2.07 and OUTPERFORM call.

We came away from OMH’s investor briefing yesterday feeling upbeat about its outlook The key takeaways are as follows:

1. OMH is still cautious on the outlook for product prices given the economic challenges in China coupled with the new industry capacity set up during the price upcycle in 2021. Hence, prices are being capped currently. YTD, the average spot ferrosilicon (FeSi) price contracted 25% YoY to USD1,481/MT in 9MFY23 (against our FY23F assumption of USD1,500/MT) while that of silicomanganese (SiMn) declined 29% YoY to USD988/MT (vs. our FY23F assumption of USD900/MT).

2. It raised its guidance for FY23F output from its plant in Sarawak to 340MT-430MT, from 340MT−400MT three months ago. This is on the back of higher capacity utilisation as more furnaces, currently under major maintenance, will be restarted sooner than expected. At this level, its FY23F production will be similar to that of FY22. This is also in-line with our assumption of 377MT.

3. As at 30 Sep 2023, 15 out of its 16 furnaces were in operation with seven furnaces producing FeSi and eight furnaces producing manganese alloys (Mn Alloy). The remaining one FeSi furnace is undergoing conversion back to a MetSi furnace and shall resume production in early-2024. This means all its 16 furnaces will be operational in 1QFY24.

4. Pertaining to the tax exemption awarded to the Samalaju smelting plant under Pioneer Status, (the first 5-year tax exemption period started in 1 Dec 2016 and had expired in 30 Nov 2022), a second 5- year tax exemption (from 1 Dec 2021 to 30 Nov 2026) is now at the consultation stage with an outcome expected by early-2024. Meanwhile, OMH has provided for a 24% tax on 100% of its taxable income since FY22. Once the tax exemption is approved, OMH’s annual tax position for the smelting plant will be adjusted accordingly.

Forecasts. Maintained.

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 7.4x (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 - 3 Nov 2023