Oiltek International
Price target: PhillipCapital ‘unrated’
Benefitting from push for wider use of sustainable fuel
Oiltek International, a design and engineering firm for vegetable oil refineries, is seen as a beneficiary of the ongoing push for more sustainable fuel, says Peggy Mak of PhillipCapital in an unrated report on April 8.
The company, 68.1% held by Koh Brothers Eco Engineering, has the know-how to process waste fats and oil into intermediate feedstock for the production of sustainable aviation fuel.
In Indonesia, where Oiltek generates more than three-quarters of its business, the government has ordered the use of more biodiesel.
From last August onwards, the industry was required to blend 35% palm-based biodiesel with fossil diesel to reduce fuel imports, lift domestic demand for palm oil and cut emissions. A 40% blend will be imposed down the road. Similarly, Malaysia has proposed a 20% blend for the transport sector, although this has not been made a requirement nationwide due to limited blending facilities.
“We expect more investments into biodiesel plants as each state seeks to be self-reliant in supply,” says Mak.
In addition, there is a growing demand for sustainable aviation fuel (SAF), with many countries mandating 3% to 10% use by 2030.
Mak believes that Oiltek will ride on this demand as the international aviation industry targets reaching net-zero carbon emissions by 2050.
According to Mak, Oiltek can help treat palm oil mill effluent and used cooking oil as feedstock for the production of hydrogenated vegetable oil, in compliance with the International Sustainability and Carbon Certification.
Key factors driving Oiltek’s business include higher consumption demand for vegetable oil used in food and downstream applications, the use of palm oil products as a substitute for some food ingredients such as cocoa butter, and the push for the use of biodiesel as a greener fuel. Biodiesel can be produced from vegetable oil or waste oil.
Mak thinks Oiltek’s key assets are the proprietary process technology and know-how. Plant fabrication and installation work are outsourced to third-party fabrication plants, thus minimising capex needs.
As a result of this asset-light model, the company generated an attractive FY2023 ROE of 28% despite having net cash of RM132 million ($37.5 million) on its balance sheet and strong free cash flow.
Mak points out that Oiltek’s FY2023 free cash flow (FCF) was 13.7 cents per share. Its share price now trades at 1.86 times P/FCF and below net cash of 26.5 cents per share, and it has declared a dividend of 1.6 cents or a yield of 6.4% in FY2023.