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 5HV , has the know-how to process waste fats and oil into intermediate feedstock for the production of sustainable aviation fuel.
According to Mak's overview, there has been a regulatory push to raise biodiesel consumption, driving investments in biodiesel refineries.
In Indonesia, where Oiltek generates more than three-quarters of its business, the government has mandated 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.
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Oiltek, according to Mak, can help treat palm oil mill effluent and used cooking oil, in compliance with the International Sustainability & Carbon Certification, as feedstock for the production of hydrogenated vegetable oil.
Key factors driving Oiltek's business include higher consumption demand for vegetable oil used in food and downstream applications; palm oil products as a substitute for some food ingredients, such as cocoa butter and 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 minimizing capex needs.
As a result of this asset-light model, the company was able to generate an attractive FY2023 ROE of 28%, despite the net cash of RM132 million in its balance sheet, and strong free cash flow.
Mak points out that Oiltek's FY2023 free cash flow/share was 13.7 cents. Its share price now trades at 1.86x 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.
As at end of last December, Oiltek's order book reached a record RM382 million, up 64% in FY2023.
Oiltek shares last changed hands at 25 cents, up 8.7% year to date.
