Investment Merits

• Largest vertically integrated manganese and silicon smelter in Asia  (ex-China)

• Riding on growing regional demand for steel, urbanisation growth  in Southeast Asia, and public infrastructure investment

• Lowest cost quartile ferroalloy smelter in the region, backed by low  cost, environmental-friendly hydropower, and 10-year tax holiday

Company Profile

OM Holdings (OMH) is the largest vertically integrated manganese and  silicon smelting company in Asia (ex-China). It primarily engages in the  business of trading raw ores, and the smelting and marketing of  processed ferroalloys. With an established history of over 25 years in  the industry, the company is one of the world’s leading suppliers of  manganese ores and ferroalloys. The products currently in its portfolio  are mainly manganese and silicon alloys – both are key alloying  elements with no known substitutes. OMH owns four manganese alloy  and ferrosilicon furnaces, yielding c.360 kilotonnes annually.

Highlights

Lowest-cost quartile ferroalloy smelter in the region. In view of  rising global power prices and power liberalisation policies in China –  creating a solid price floor for power-intensive ferroalloy smelters –  OMH’s sustainable and competitively-priced 350MW power plant is  backed by low-cost environmental-friendly hydro power, thanks to its  20-year power purchase agreement with Sarawak Energy. On top of  that, the company’s smelting plant is conveniently located along the  seaborne route for manganese ore exports from South Africa and  Australia. This provides OMH with ready access to raw material sources  for quartz and reductants. In contrast to its China peers, the company  also enjoys zero import duties and export taxes on ferroalloys – allowing it to yield a pricing advantage.

Beneficiary of Southeast Asia’s rapid urbanisation. The current  product offerings in OMH’s portfolio are mainly manganese and silicon  alloys – both key alloying elements for steel, with no known substitutes.  According to United Nations Department of Economic and Social  Affairs, ASEAN’s urban population is expected to increase 2.5bn by  2050. The regional steel demand remains positive, with the surge of  foreign investments in Southeast Asian steel mills – 25m megatonne  (Mt) since 2015 (current capacity: 90.8m Mt). OMH is in the sweet spot  of growing steel demand – backed by rapid urbanisation growth in the  region, recovery in construction sector, and growing public  infrastructure investments.

Expansion into silicon metal. Silicon metal is made up of 99% pure  silicon and is commonly used in aluminium, electronics, chemical, and  solar sectors. The fast-growing renewable energy sector, ie solar, has in turn spurred demand for key materials required in solar panels, ie silicon. The company has shared its major development plan for 2023 and beyond – including acquiring an additional furnace for ferrosilicon, manganese alloys, and metallic silicon. We are of the view that OMH’s plan to venture into these new metals comes at the right time – giving it an upper hand in riding the wave of growing renewable energy demand, and increasing awareness in ESG and sustainability investing.

Company Report Card

Latest results. OMH’s FY22 revenue was MYR3,837.4m, a 9.8% YoY  growth attributable to higher ferroalloy ASP, robust ferroalloy  production, and the absence of loss-making mining segments. It  declared a final dividend of 4.5 sen per share for FY22 – at 10% payout  ratio and c.2% yield. Moving forward, the company aims to distribute  10-20% of profit after tax.

Balance sheet. OMH has total borrowings of MYR254.7m as at 2022 – the majority of it associated to its Sarawak project financing. This  translates to a gearing ratio of 0.63x, a significant decrease over the last  six years (2016: 3.05x).

Segment Breakdown. OMH’s FY22 earnings were mainly driven by its  core business – smelting, which recorded a YoY increase in total output  for Ferrosilicon (113,783Mt, +28.9% YoY) and Manganese alloys  (203,938Mt, +6.2% YoY). On the flipside, FY22 ferroalloy prices were  dampened by softer demand from steel mills, amid the lockdown in  China and overall weak sentiment – easing the ferrosilicon and  manganese alloys’ realised ASP for the year.

Investment Case

We believe OMH’s earnings would continue to sustain its growth  moving forward, backed by the reopening of China’s economy – the  largest consumer and producer of ferroalloys (c.70%) would warm the  sentiment of the industry in terms of demand and realised ASP. We  value the stock based on a target 7x P/E based on 2023 earnings,  slightly above its 2-year historical PE of 6x but below regional peers’  average of 12x. Our valuation is justified – given the better outlook for  the ferroalloy and steel industries.

Source: RHB Securities Research - 16 May 2023