KUALA LUMPUR (Oct 26): Kenanga Research has initiated coverage of OM Holdings Ltd (OMH) with an "outperform" rating at RM1.90 and target price (TP) of RM2.54.

OMH is the largest manganese and silicon smelter in Southeast Asia.

Its main ferroalloy smelting plant in Samalaju, powered by Bakun hydroelectric plant, has the lowest cost structure in the region and is highly environmentally friendly.

In a note on Wednesday (Oct 26), the research house said OMH’s fortunes are tied to global steel demand which is projected by World Steel Association to grow by 2.2% in 2023.

“We expect OMH’s FY2022F/23F earnings to surpass that of FY2021 driven by capacity expansion and elevated average selling prices (ASPs),” it said.

Kenanga said it expects FY2022 net profit to jump 53% year-on-year (y-o-y) attributable to a better ASP mix and operation efficiency, despite a 10% contraction in revenue due to cessation of OMQ and Bootu Creek Mine, but FY2023 net profit is forecast to fall 8% y-o-y on the back of a 13% decline in revenue as ASPs fall.

“Nonetheless, higher production volume of 16% will help to mitigate the fall in ASPs.

“Meanwhile, the strong ASPs in the past two years have helped to strengthen its balance sheet, with net gearing set to improve to 0.30 times by FY2023 from 2.09 times five years ago in FY2017,” it said.