KUALA LUMPUR: Integrated manganese player OM Holdings Ltd (OMH) could be in for bumper earnings as high ferroalloy prices continue to be supported by a shortage in supply.
Analysts noted that the ongoing power crisis, especially in Europe, China and India, has put further pressure to the current supply constraints for ferroalloys. Record high electricity and coal prices in Europe has led some producers to either cut or completely shut down their production for good, despite the fact that ferroalloy prices are currently at an all-time high.
This unprecedented global supply crunch, said UOB Kay Hian Research, has continued to push ferroalloy prices up. Consequently, the brokerage is expecting strong earnings ahead for OMH. Despite the movement control order disruption, OMH posted strong core earnings of RM80mil for the first half of 2021 (plus 7.6% year-on-year). With the easing of the lockdown, OMH is now operating at 100% workforce capacity with 12 furnaces running.
It said a more meaningful growth will be seen in 2022 when the remaining four furnaces are fully restarted once manpower constraints have been alleviated with the border reopening.
“While prices may ease gradually entering 2022, we believe prices will remain firm in the long run, albeit not at the current high, as the structural supply issue may persist.
“OMH may also potentially see some increase in demand, benefitting from the spillover effect – filling up the void left by some global producers as they exit the market due to the high power prices.
“We raise our earnings forecasts for 2022-23 to reflect higher ferroalloy prices. It is a major recovery play in 2022 as OMH is set to achieve a multi-year profit bonanza, supported by robust demand, strong prices and improved production,” the research house said in a note.
It raised its 2022-23 earnings forecasts by 12.4% and 13.2%, respectively, in line with its increase in average selling price assumptions of FeSi alloy to US$1,900 (RM7,900) and US$1,700 (RM7,068) per tonne for 2022-23 accordingly.
“If prices continue to rise, based on our sensitivity analysis, every US$100 (RM415) per tonne increase to our FeSi and Mn alloy price assumptions will boost earnings by about 25% per year.”
OMH also has a low-cost advantage over global peers. Its smelters in Sarawak offer lower costs than its peers’ mainly due to the 20-year power purchase agreement with Sarawak Energy.
The agreement provides OMH with 300MW of low-cost environmentally-friendly hydropower, placing OMH in the lowest quartile for production costs. UOB Kay Hian also noted that prior to the pandemic, comparable Chinese smelters run at a cost that is about 30% higher than this.
The research house has maintained its “buy” call on the stock with a higher target price of RM4.21.