Oiltek International IPO Note - KGI Securities 2022-02-22: Riding Long-Term Trends

OILTEK INTERNATIONAL LIMITED (SGX:HQU)

Oiltek International IPO Note - Riding Long-Term Trends

Oiltek International (SGX:HQU) is an integrated technology and renewable energy solutions provider in the vegetables oils industry. It mainly provides engineering, procurement, design, construction, and commissioning (EPCC) of refining plants, downstream speciality products and processing plants. Oiltek International's clients include companies such as Wilmar International (SGX:F34), Sarawak Oil Palms and Sime Darby Plantation.

Oiltek International will trade at 8.4x FY2020 P/E, a slight premium to locally listed peers such as PEC (SGX:IX2) and Moya Holdings Asia (SGX:5WE). This may partly be justified by the company’s pivot towards renewables-related projects and supported by the favourable supply-demand dynamics for edible and non-edible oils in the next 12-24 months.

Oiltek International will be issuing 22.5mil invitation shares comprising 22.0mil placement shares and 0.5mil public offer shares at S$0.23 per share, raising gross proceeds of S$5.2mil.
Oiltek International will have a post-IPO market cap of S$33mil.
The public offer opened from 6pm, 18 Feb and will close at noon on 1 Mar.
Oiltek International's Shares will start trading at 9am on 3 March.

Malaysia and Indonesia make up around a third of Oiltek International's total revenue over the past three years. Revenue generated from these two countries went up to as much as 78% of total revenue in 1H2021, not surprisingly as Malaysia and Indonesia are the top two largest palm oil producing nations in the world.
Between 60% and 85% of Oiltek International's revenue is generated from clients operating in the edible and non-edible oil refinery business. In the longer term, Oiltek International is positioning itself to ride on the renewable energy trend, having grown the revenue generated from its renewable energy segment to 20% of total revenue in FY2020 and 26% in 1H2021.

In the next 12-24 months, Oiltek International’s prospects should track the overall growth in the edible and non-edible oil markets, specifically that of palm oil. Palm oil is one of the major ingredients used in up to 50% of all daily-use products. While global production volume of palm oil has remained relatively flat at between 73-76mil tons from 2018 to 2021, palm oil prices in 2022 have hit all-time highs on favourable supply-demand dynamics.

Palm oil prices are likely to remain above MYR 4,700 (US$1,124) per ton over the next six months, according to LMC International. In addition, it will still take another 12 months for Southeast Asia’s palm oil production to recover to end-2019 levels, after supply from Indonesia and Malaysia declined in 2020 and 2021.
In addition to supply constraints in Indonesia and Malaysia, palm oil prices have been buoyed by higher prices of alternatives such as soybean. In turn, soybean prices have been underpinned by tight supply due to yield losses in draught-hit South America.

The leading palm oil importers will continue to be led by China and India, the two most populous nations in the world.
According to the Council of Palm Oil Producing Countries, China’s palm oil consumption in 2022 is expected to increase due to lower supply of rapeseed oil and soybean oil.
Likewise, India’s palm oil imports are likely to be spurred by the recovery of its hotel, restaurant and catering segment and the lowering of import duties.

Oiltek International's two closest SGX-listed peers operating in the EPCC space are Moya Holdings Asia (SGX:5WE) and PEC (SGX:IX2). Both are trading at around 6-7x historical P/Es. However, these companies operate in different sectors. Moya Holdings Asia designs and builds water treatment systems while PEC mainly serves the O&G and petrochemical sectors.
While Oiltek International’s P/E is a slight premium, we think this is justified by the favourable dynamics in the edible and non-edible oil industry, in addition to the growing revenue from renewables-related projects.

Joel Ng KGI Securities Research | https://www.kgieworld.sg/ 2022-02-22

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