09/08/2011 (Commodity Online) - Despite the steep fall in CPO prices since the start of the year (-20%), palm oil companies have stayed relatively resilient. Macquarie Equities Research believes that equities are currently factoring in the CPO price of RM3, 100/t, in line with Macquarie’s 2012 forecast, but there is near-term downside risk to valuations.

“Our preference is for stocks with strong earnings growth over FY10–12E and where the valuations look attractive, despite our price downgrade. These would be KL Kepong (KUL:KLK) and New Britain Palm Oil( LON:NBPO) , which have strong earnings growth relative to peers and London Sumatra(JAK:LSIP), which trades at a 30% discount to its closest peer, Astra Agro Lestari.

We have also turned more positive on Sime Darby( KUL:SIME )as management seems to be taking the right steps in tightening internal controls and realigning employee incentives, which could improve operational performance in coming years.” said a research report.

Market scenario

As the market tries to establish price direction at the moment, every positive data point is matched with a negative one, in Macquaire’s view.

Crude palm oil (CPO) inventories are high and will continue to rise, but widening price discount with other oils has made it attractive in recent months. On soybeans,US production is likely to fall but Brazil is sitting on large inventories. China demand continues to be slow, but veg oil price caps are expected to be lifted in August.

“Our bias is for CPO prices to weaken in 2H11 on high inventories and subsequently rise marginally next year as consumption rises.” the agency said.

Macquarie also forecast world edible oil inventories to rise this year and next.

It adds: Despite the acreage shift in the US away from soybeans and poor growing conditions for rapeseed in Europe and Canada, the edible oils complex is likely to be well supplied due to existing large soybean inventories in South America, strong CPO production and favourable sunseed production.

“We forecast global edible oils stock-to-usage ratio at 12.5% in 2010-11 (Sep) and 12.3% in 2011-12. This is significantly higher than the average ratio of 11.3% over the past 10 years.” the report said.

Current strong production and rising inventories have caused the price discount between CPO and soy oil to widen to US$220/t (vs past five-year average of US$160/t).

“However, we expect this to narrow to US$120/t in 2012, as we forecast palm oil to take lion’s share of the incremental demand for edible oils in 2012.” the report from Macquarie said.

“We also expect global CPO inventories to rise to 8.5mt this year (from 6.6mt last year) and then decline to 8.0mt next year. Nevertheless, given that the total edible oils stock-to-usage ratio would still be quite comfortable, prices are unlikely to rally significantly in our view, in absence of significant weather shocks.” It added.

Macquarie has reduced their CPO price assumptions by 7% to RM3200/t (from RM3,425/t earlier) for 2011, but raised their price forecast by 2% for 2012 to RM3,100/t (from RM3,050/t earlier).

“We estimate CPO prices to average RM2,940/t in 2H11 and recover subsequently in 2012.” The report said.