OM Holdings Bhd (OMH) is rising through the challenge despite its cautious stance on the price outlook for its products given the economic challenges in China as well as the oversupply situation, according to Kenanga Research.
In its Company Update today (Nov 3), the research house said the new industry capacity set up during the price upcycle in 2021 is also a cause for concern resulting in prices being capped currently.
“YTD, the average spot ferrosilicon (FeSi) price contracted 25% YoY to USD1,481 per MT in 9MFY23, against our FY23F assumption of USD1,500 per MT, while that of silicomanganese (SiMn) declined 29% YoY to USD988 per MT, versus our FY23F assumption of USD900 per MT.
It also said the group is 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),” it said.
Kenanga, therefore, maintains its OUTPERFORM call, its forecasts, with TP of RM2.07, based on 6 times FY24F PER plus a 5% premium by virtue of its 4-star ESG rating. The valuation is within the range of its international peers of 7.4 times.
“We continue to like OMH for its structural cost advantage over its international peers given its access to low-cost hydro-power under a 20-
year contract ending 2033, 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 its appeal to investors given its clean energy source.
Other key takeaways post-briefing is that the group has raised its guidance for FY23F output from its plant in Sarawak to between 340 MT and 430 MT, from between 340 MT and 400 MT three months ago.
“At this level, its FY23F production will be similar to that of FY22. This is also in-line with our assumption of 377 MT. 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,” it said.
Pertaining to the tax exemption awarded to the Samalaju smelting plant under Pioneer Status, 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, Kenanga added.
“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.”
The research house’s risks to its recommendation include a global recession resulting in a sharp fall in the demand for steel, hurting FeSi and Mn alloy prices, an escalation of raw material prices, and major plant disruptions or closures.
