PhillipCapital analyst Paul Chew has initiated a “buy” call on Catalist-listed Oiltek International HQU with a target price of 70 cents.
In his report dated June 10, Chew notes Oiltek’s “enviable” business has a return on equity (ROE) of 31%, is asset-light and backed by net cash of RM132 million ($37.9 million), which is around 70% of its market capitalisation.
“Its high returns stem from selling proprietary know-how and successfully designing, operating, and commissioning customer plants with a 45-year track record of project completions,” the analyst writes.
At present, Chew believes that the company, which is dependent on its customers’ capital expenditure (capex) plans, is riding on multiple capex cycles, especially in the palm oil sector.
“These include growth in biodiesel capacity in Malaysia and Indonesia, higher value-added products downstream, and expansion of customer base in Africa and Latin America,” he says, adding that the largest growth opportunity will be in the growing use of sustainable aviation fuel oil that uses palm oil effluents in Southeast Asia.
In the FY2023 ended Dec 31, 2023, Oiltek’s net profit surged by 51% y-o-y to RM19.1 million from its strong order wins totalling RM322 million.
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Its order book has been growing at a 50% compound annual growth rate (CAGR) over the past four years, with FY2024 poised to become the fifth straight year of record orders.
On June 3, Oiltek announced that it secured new contracts worth RM94.8 million, bringing its order book to a new record high of RM400.5 million.
Chew’s target price is based on 15 times Oiltek’s estimated FY2024 P/E.
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“There are no direct comparables. We peg Oiltek at a discount to the engineering sector, which trades at 24 times forward P/E. FY2024 EV/ebitda is 1 times,” he says.
As at 10.58am, shares in Oiltek are trading 4.5 cents higher or 12.33% up at 41 cents.
