Published March 4, 2009

Palm oil may fall 15% in 3-6 mths: Goldman

The slide is likely to halt rally in plantation stocks

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INVESTORS should take profits on shares of plantation companies including Wilmar International Ltd, the world's largest palm oil trader, as prices of the commodity are poised to drop, Goldman Sachs Group Inc said.

The price of crude palm oil may fall as much as 15 per cent in the next three to six months, halting a rally that's helped plantation stocks beat their local benchmarks, analysts Patrick Tiah and Nikhil Bhandari said in a report yesterday.

Palm oil futures have risen 9 per cent this year as output in Malaysia enters a seasonal production low, and on signs that an increase in exports this year from the world's second-biggest producer of the commodity will continue even amid the recession.

'While long-term fundamentals have improved, we believe the recent rally has priced in too much, too soon, and is vulnerable to a short-term correction,' the analysts wrote.

'We think crude palm oil prices may pull back 10 to 15 per cent in the short term, and that could prompt profit-taking in the sector.'

May-delivery palm oil on the Malaysia Derivatives Exchange dropped as much as 1.6 per cent to RM1,841 (S$769) a metric ton, extending the previous day's 1.3 per cent decline.

The most-active contract traded at RM1,847 at 3.49 pm local time.

Goldman cut its rating on Wilmar shares to 'neutral' from 'buy', saying the shares offer 'limited upside' to the firm's 12-month price target of S$3.15 a share.

The brokerage maintained its 'sell' rating on Sime Darby Bhd, the world's biggest palm oil producer, citing 'rich valuations'.

Wilmar shares have gained 7 per cent since Feb 26, a day before the company posted a 60 per cent jump in fourth-quarter profit. The stock declined as much as 1.7 per cent to S$2.87 in Singapore yesterday. Sime Darby lost as much as 2.75 per cent to RM5.3 in Malaysia, cutting its year-to-date gain to 4 per cent.

Wilmar trades at 10.3 times its future earnings, compared with 9.6 times for Singapore's Straits Times Index, according to data on Bloomberg.

Sime trades at 15 times its future profit, compared with 11.7 times for the Kuala Lumpur Composite Index.

'Plantation stocks have outperformed over the last three months, with price-to-book ratios mostly at or above mid-cycle levels while 2009 estimated price-earnings is at a premium to domestic market averages,' the analysts wrote.

Meantime, Goldman raised its recommendation on Indofood Agri Resources Ltd, the palm oil unit of Indonesia's biggest noodle maker, to 'buy' from 'neutral' because it has the lowest price-earnings ratio.

The 12-month target price for the stock was raised to 70 Singapore cents from 50 Singapore cents. -- Bloomberg