Secondary Listing?

From my reading of the posting about OMH so far, I can sense that we are all agreeable that:

1) - OMH management has been instrumental to the success and the dramatic turnaround of the company from loss of a few hundred millions over 2012-2016 to profit >A$160m and EBITDA > A$300m in 2018. Kudos to the founder Mr Low who has the vision to go into Sarawak and develop the world class smelter, when nobody has the foresight to tap into the cheap power source there. The management has worked very hard for the shareholders to bring the Company to where it is now. I salute the management for the hardwork and dedication.

2) - The business has the potential to generate even higher return, but subject to the volatility of the commodity cycle. I believe we have the confidence that the management will be able to maintain sustainable growth which will translate to higher dividend and capital returns for all.

The issue at this point is (i) low liquidity and buying interest and (ii) substantial below market PE (OMH: <5x) vis market peers for pure commodity miners (PE 10-15x) and even some smelter players (> PE 15-20x or more). Even though OMH is included in the S&P ASX 300 companies (meaning OMH is now ranked amongst the Top 15% of ASX), it is still not able to generate any research coverage from the Australian brokerage houses. I have also not seen any Aussie funds listed as shareholders. I can only attribute to the fact that Australian analysts are probably more open to initiate coverage for Australian companies based in Australia (whereas OMH is based out of Singapore) where they are able to meet the management on regular basis to discuss updates. The other reason could be due to the fact that the analysts there prefer pure mining play.

Given OMH profile (mining/industrial) and with >80% of its sales to Asia Pacific region (in particular China), a secondary listing possibly in Hong Kong (or even Malaysia) would likely be able to generate more analyst coverage there and I believe the investors there are more able to appreciate companies like OMH, with its products feeding into the industrial growth of China. The Company should still maintain ASX listing for the benefit of Australian shareholders.

How a secondary listing can be useful for OMH as a company?

1) OMH currently has debt A$512m and Cash A$91m. If the commodity price were to collapse tomorrow, the EBITDA will be much reduced and Debt/Cash of this level would not be pretty. If the Company can build up its Cash level to A$150-250m, then they will be in a very strong position to weather any commodity downturn. OMH could use the secondary listing to raise awareness and/or some placement cash (possible option) to either reduce the debt or keep as safety buffer or capex. I believe these Asian exchanges would be able to give OMH the fair market PE valuation. A higher valuation would means a lower dilution to all shareholders. Slight shareholder dilution to put the company in an even stronger financial position would be worth considering.

2) In my years of investments, I have seen companies with low liquidity not being able to generate enough interest to do the necessary equity placement to help them to ride through difficult times. In some cases, they went in suspension/liquidation due to cash crunch. A company in the right exchange with liquidity can be crucial when the need to do equity placement to help the company ride through difficulties. Market conditions are very volatile and unpredictable nowadays, it is better to have the option to be in an exchange that can provide the necessary liquidity if the need arises. In the commodity market, all the more it is volatile. Nobody knows when you need to activate this option, hopefully not.

Stock with low liquidity is not healthy as it can cause unnecessary price HUGE volatility. We can see that with just a small traded volume of few hundred thousand shares for OMH in the past weeks, it can cause a sharp drop of >20% which translates to loss of value of >A$200m. Stocks with healthy volume would be able to withstand small sell volume.