PHILLIP Capital initiated coverage on Oiltek International with a “buy” call on the company’s growing book orders and its belief that the company is currently riding multiple capital expenditure (capex) cycles.
The research house set a price target of S$0.70 for Oiltek, which works out to a price-to-earnings ratio estimate of 15 times. This implies a discount when pegged to the engineering sector, which trades at a forward ratio of 24 times.
In a report on Monday (Jun 10), analyst Paul Chew said the valuation was made against the engineering sector as there were “no direct comparables” to renewable energy solutions provider.
Looking ahead, Chew expects dividends to grow by 13 per cent in the current financial year due to Oiltek’s asset-light business model that minimises the company’s capex needs.
He noted Oiltek’s capex to be “only RM300,000 to RM400,000 (S$85,114 to S$114,818) per year”.
The analyst also expects Oiltek’s order book for FY2024 to mark a fifth straight year of record orders. In his view, the largest growth opportunity for Oiltek will come from the rising use of sustainable aviation fuel oil made with palm oil effluents in South-east Asia.
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“Hydrogenated vegetable oil, also known as hydroprocessed esters and fatty acids, is one of the frontrunner technical pathways for sustainable aviation fuel output in the near term,” said Chew.
Sustainable aviation fuel is a liquid fuel currently used in commercial aviation with the potential of reducing carbon emissions by up to 80 per cent.
In view of this, and the international aviation industry’s targets to achieve net zero emissions by 2050, Chew believes that the company will receive more order wins for hydrogenated vegetable oil feedstock treatment plants.
Shares of Oiltek were trading up 13.7 per cent or S$0.05 at S$0.415 as at 1.32 pm on Monday.
