09/10/2007 (The Edge Daily) - ASEAMBANKERS Equity Research expects palm oil prices to stay firm over the next 12 months with the potential to test RM3,000 per tonne. This was against its earlier anticipation of softer palm oil prices of RM2,200-RM2,400 level as production enters seasonally higher production months and amidst significant production recovery from dry spell experienced earlier in the year.

The research house said the fundamentals of palm oil had yet to change much with Malaysian palm oil inventory level set to hit 1.6 million to 1.7 million by October this year (from 1.45 million in Aug 07). But the market is likely to discount the rising inventory level to take advantage of externalities.

It said prices of wheat and competing vegetable oils have led price rallies that have clearly benefited palm oil.

Aseambankers Research said palm oil was benefiting from a global commodity upswing, pointing out that the risk of supply disruption in the future remains. Prices of wheat, sunflower seed and oil, rapeseed and oil, and soybean and products have reached their all-time highs in anticipation of acute shortages of stock level in the coming Oct/Sept 07/08 season as grains and oilseeds are expected to fight for acreages.

Palm oil is expected to fill the gap to relieve the tightness in supply of seed oils as production of palm oil is anticipated to grow by an unprecedented 3.7 million to 3.8 million next year, according to Oil World.

It also said the high crude oil prices of US$80 (RM272) per barrel from US$60 a few months back have once again encouraged the use of soy-based biodiesel. The cut in the US Federal Reserves’ rates and general concerns over the state of the US economy had led to the weakening of the US dollar against major currencies and these have fuelled investment/ demand in commodities.

“We are cautiously optimistic that palm oil prices could remain competitive at present level of RM2,400 to RM2,600 over the next 12 months. And we are not ruling out the possibility of spike in price to test RM3,000 in the near term even though we think it is unlikely to stay at that level for an extended period of time as supplies are ample relative to other major seed oils,” it said.

Aseambankers Research said the longer term outlook of palm oil are less rosy vis-à-vis other competing oils as the region, particularly Indonesia, has been experiencing tremendous investments in the cultivation of new palm oil plantations in recent years.

“These efforts will come to fruition over the next three years and will provide the answer to growing renewable energy requirements globally despite ongoing negative campaigns in the West by the NGOs undermining these efforts. Hence, we believe the long term price outlook for palm oil will still remain favourable with a base support price of around RM2,000,” it said.

The research house said due to the supply tightness globally on oilseeds and grains, it is cautiously optimistic that the palm oil sector could benefit with another year of favourable prices.

It upgraded its CPO price assumption for 2008 to RM2,450 from RM2,200 and 2009 average CPO price assumption to RM2,200 from RM2,100.

“As for 2007, we are upgrading our spot CPO price forecast to RM2,380 from RM2,200 previously but we are not doing a blanket adjustment to our 2007 earnings forecast as different companies have different forward sales policies, and these policies may have negative implications with the imposition of CESS tax effective June 1, 2007 which pegs charges based on MPOB’s (Malaysian Palm Oil Board) spot prices as opposed to the respective companies’ actual sales proceeds,” it said.

The research house upgraded its sector call to selective Overweight (from Neutral) for 4Q07 with special focus on small- to mid-cap stocks which has trailed the bigger players in recent price rally. It believed the valuation gap between the two groups should narrow in the near future.

Among the small- and mid-cap stocks, it prefered exposure to Asiatic (Revised target price: RM7 (from RM6.30) on 16x mid-09 EPS, TH Plantations RTP: RM4.50 (from RM4.22) on 13x mid-09 EPS, Tradewinds Plantation RTP: RM4.50 (from RM3.70) on 15x mid-09 EPS, CB Industrial RTP: RM5.80 (from RM5.70)) on 13x mid-09 EPS and Hap Seng (Not Rated).

It also said Al-Hadharah Boustead REIT (Boustead REIT) provided investors with an exposure to the palm oil price run while enjoying high dividend yields as the REIT has promised to pay out at least 90% of net income.