10/03/2008 (Reuters), Bangkok - Thai growers of "energy" crops such as palmoil and sugar are enjoying big profits and soaring share prices as demand surges for alternative fuels, but state price controls to fight inflation may check further gains.

Like their regional peers, agriculture firms such as Univanich Palm Oil UVAN.BK, Thailand's biggest palm planter, and smaller rival Chumporn Palm Oil CPI.BK are trading near record highs hit last month on a surge in palm oil prices.

As crude oil prices CLc1 have soared to $105 a barrel, investors like the look of soft commodities used in bio-fuels.

"We're a buyer. It's a hot asset class and should continue for years as demand for alternative energy grows," said Prapas Tonpibulsak, chief investment officer of Ayudhya Fund Management which manages 45 billion baht ($1.4 billion) in assets.

Analysts' top picks include Thai sugar and ethanol producer Khon Kaen Sugar KSL.BK and palm planter United Palm Oil UPOI.BK, and Singapore's Wilmar International (WLIL.SI: Quote, Profile, Research), the world's biggest listed palm oil firm.

"We are bullish on soft commodities," said Nomura analyst Sean Darby. "The longer the oil price remains high, the greater the probability of prices rising within the economic food chain."

Thailand, the world's third-largest palm oil producer, is stoking demand for biofuels, and last month said diesel must contain at least 2 percent biodiesel.

The price of domestic crude palm oil, the best suited and cheapest for producing biodiesel, rose 50 percent last year to an average 24 baht per kg and is expected to rise further this year.

Shares in Thai palm oil producers have soared, with Univanich Palm up 57 percent and United Palm oil UPOI.BK up 42 percent last year. So far this year, they have far outperformed the main Thai stock index's .SETI 4.3 percent fall, with gains of 41 percent and 16 percent, respectively.

Pichai Lertsupongkij, head of sales at BNP Paribas Thanachart Securities, said Univanich may be fully valued.

"Our favourite is United Palm Oil, but we expect no dramatic returns on its share price at this point," said Pichai, who has a target price of 75 baht, in line with Monday's quote of 74.50 baht.

United Palm Oil trades at nearly 12 times actual earnings, just below Univanich Palm's 13.5 times. Indonesia's Astra Agro AALI.JK and Malaysia's IOI Corp (IOIB.KL: Quote, Profile, Research) both trade at around 24-26 times.

SUPPLY CONCERNS
Thailand is expected to produce 1.3 million tonnes of crude palm oil this year, with 900,000 tonnes used for cooking oil and the cosmetics sector. The rest is earmarked for biodiesel.

But traders say an extra 25,000 tonnes will be needed if PTT PTT.BK, Thailand's biggest energy firm, pushes ahead with plans to boost sales of its 5 percent biodiesel blend, or B5.

"Demand is growing. We need to expand our palm plantings as soon as possible otherwise there will be a supply shortage," said Thavee Srisukon, president of the Palm Oil Association.

Thailand hopes to add 400,000 acres by encouraging farmers in the north and northeast to grow lucrative palm oil made from tapioca, soybean, sugarcane, or even rice.

But it will take time and yields will be lower than those in southern Thailand, where growing conditions are better. The Agriculture Ministry says it takes up to three years for new palm trees to mature and start producing.

Food firms are feeling the pinch from rising prices.

Thai President Foods TF.BK is moving to cut the amount of palm oil used in packets of its popular instant noodles.

With many ordinary Thais struggling to cope with rising prices, the government has imposed price controls on key staples such as palm cooking oil and sugar. Oil companies complain they are left to bear the burden.

Thai Vegetable Oil TVO.BK, Southeast Asia's largest soybean oil firm, is expected to see only a 21 percent rise in 2008 earnings due to tighter margins. That compares to a 167 percent increase in 2007 profit.

"With price controls, it's not easy for them to raise prices and investors should be cautious on company margins," said Pichai at BNP Paribas Thanachart Securities said. ($1=32.44 Baht)