CGS International analyst William Tng has initiated coverage on Catalist-listed Oiltek International with an “add” call as he sees several upsides to the integrated process technology and renewable energy solutions provider including a strong order book and its asset-light business.
In his Jan 3 report, Tng notes that FY2024 was a good year for orders for the company with a cumulative win of nearly RM200 million ($60.9 million) year-to-date (ytd) as of Oct 29, 2024. The company’s outstanding order book to be completed over the next 18 to 24 months is at RM401 million.
Looking ahead, the analyst sees possible order win drivers such as higher biodiesel blending requirements for Malaysia, which ranges from 10% to 20% in FY2026. Oiltek is also likely to benefit from the increased use of sustainable aviation fuel, which will result in more demand for refining plants.
“According to the International Air Transport Association (IATA), sustainable aviation fuel only accounted for 0.3% of global jet fuel production in 2023, which leaves a long runway for increased share of global jet fuel from sustainable aviation fuel, resulting in higher demand for refining plants,” Tng writes.
Asset-light business strategy
Oiltek, which outsources the fabrication of its parts and modules to third parties, has just 81 employees as at April 4, 2024.
The company’s asset-light business means it gets to enjoy a negative working capital cycle as the group does not carry much inventory and is usually able to repay suppliers over a longer period.
In Tng’s view, Oiltek’s key competitive advantage is its success and expertise in the design and assembly of refining plants. He adds that the company also creates entry barriers with patented process technologies.
Target price
Tng has given Oiltek a target price of $1.32, which represents an upside of 28.16% over the stock’s last-traded price of $1.03. His target price is also based on an FY2025 P/E of 18.8 times, or a 10% discount to the sector average given the company’s smaller market capitalisation.
To him, further order wins and accretive mergers and acquisitions (M&As) are key catalysts for any upside in Oiltek’s share price, while order cancellations, delays, and unfavourable foreign rate movements are downside risks. Other risks include sudden increases in raw material prices and unanticipated disruptions in raw material supplies.
“Given the illiquidity of its shares (at March 15, 2024, the top 20 shareholders held 95.6% of Oiltek), any negative news on the stock or major shareholder disposal could see a sharp decline in Oiltek’s share price,” Tng adds.
Shares in Oiltek closed 2 cents higher or 1.98% up at $1.03 on Jan 3.
