OMH’s FY23 results disappointed as its net profit fell 73% on weak product prices. Its product prices are likely to be capped over the immediate term given the weak steel sector globally, but should have bottomed out. Also helping is its higher production capacity. We cut FY24F net profit forecast by 46%, reduce our TP by 13% to RM1.80 (from RM2.07) but maintain our OUTPERFORM call.

OMH’s FY23 net profit of USD18.1m missed our forecast and the consensus estimate by 48% and 39%, respectively. The variance against our forecasts came largely from weaker-than-expected average selling price (ASP) realised on a weak steel sector globally. No dividend was declared in FY23, vs. our projection of US1.5 cent.

YoY. its FY23 revenue declined sharply by 31% to USD589.2m, despite improving sales volume, as the realised ASP was substantially lower. S&P Platts data showed that ferrosilicon (FeSi) spot price plummeted by 27% from USD1,901/MT to USD1,437/MT in 2023 while silicomanganese (SiMn) spot price plunged by 24% to USD962/MT from USD1,309/MT in 2022. Meanwhile, OM Sarawak sold 294.4k MT of manganese alloy (Mn Alloy) which was 36% higher YoY while sales volume for FeSi slid slightly by 1% to 139.5k MT. Given the substantially reduced ASP, net profit plunged 73% to USD18.1m.

HoH. Similarly, its 2HFY23 turnover declined, by 16% to USD269.5m from USD319.7m in 1HFY23, on lower realised ASP despite having a higher sales volume by 47% for FeSi and 76% for Mn Alloy. S&P Platts registered 14% fall in SiMn spot price to USD890/MT and 16% decline in FeSi spot price to USD1,314/MT. As a result, 2HFY23 chalked a small net loss of USD1.0m from net profit of USD19.1m in 1HFY23.

Outlook. The company guided for a higher FY24 production volume with a total output of 430k to 470k metric tonnes per annum (MTPA) from c.434k MTPA in FY23 as FeSi production is running 6 to 8 furnaces from 5 to 7 furnaces in FY23 while Mn Alloys run at full 8 furnaces as opposed to 5 to 8 furnaces in FY23. However, its ASP will remain challenging on subdued demand from the steel sector but it should be bottoming out as YTD FY24 ASP is higher than that in 2HFY23.

Forecasts. We cut FY24F net profit forecast by 46% to USD29.6m as we lower our ASP assumption for FeSi to USD1,300/MT from USD1,350/MT and SiMn from USD950/MT to USD920/MT. We also introduce our FY25F numbers with net profit projected to grow at 69% to USD49.9m with ASP assumptions for FeSi at USD1,350/MT and SiMn at USD950/MT. We project NDPS of US1.5 cents for FY24F- FY25F.

Valuations. We only downgrade our TP by 13% to RM1.80 from RM2.07 as we roll over our valuation base year to FY25F (from FY24), based on unchanged 6x PER (consistent with an average of 6.5x for its international peers, see Page 3) 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 - 1 Mar 2024