OMH is mildly optimistic on the outlook for its product prices given the improved demand-supply dynamics. Production increase of ferrosilicon (FeSi) in China is offset by supply loss following the nationalisation of the largest Russian FeSi producer. It raised its output guidance from its plant in Sarawak. We maintain our forecasts, TP of RM1.80 and OUTPERFORM call.

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

1. OMH is mildly optimistic on the outlook for its product prices given the improved demand-supply dynamics, which have resulted in the prices rebounding from recent lows in 4QFY23. While Chinese producers have raised production, this is offset by supply loss following the nationalisation of the largest Russian FeSi producer recently.

Recall, in FY23, the spot price for FeSi plummeted by 27% from USD1,901/MT to USD1,437/MT in 2023. Similarly, the spot price of silicon manganese (SiMn) spot price plunged by 24% to USD962/MT from USD1,309/MT. OMH was not spared the plunge in product prices but it managed to achieve realised ASP that was c.2% higher than S&P Platts’ average spot price. All in, for FY23, OMH posted a 73% contraction in net profit on a 32% decline in revenue, as a 32% lower ASP negated a 17% increase in sales volume.

2. OMH raised its guidance for FY24F output from its plant in Sarawak to 460-490 MT (from 430-470 MT guided in end-Jan 2024). This is on the back of higher capacity utilisation as more furnaces, currently under major maintenance, will be restarted sooner than expected. As at end-Dec 2023, 14 out of 16 furnaces have completed major maintenance. The remaining two FeSi furnaces will undergo major maintenance works in FY25. Meanwhile, fabrication works are ongoing for its high-margin metallic silicon (MetSi) furnaces and they will be restarted within this year.

Forecasts. Maintained.

Valuations. We maintain our TP of RM1.80 which is based on unchanged 6x FY25F PER (consistent with an average of 6.5x for its international peers, see Page 8) plus a 5% premium by virtue of its 4- star ESG rating as appraised by us (see Page 5).

Investment case. 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 MTPA over the medium term, and (iii) its appeal to investor 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 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 - 7 Mar 2024