KBC Peel Hunt today drew investors’ attention to the strong upward trend in palm oil prices, which has prompted it to up its price target for one of the key players in the sector.
Palm oil futures have recently hit 27 month highs, making a significant impact for the broker’s forecasts for New Britain Palm Oil (LON:NBPO).
Peel Hunt hiked its pre-tax profits forecasts for the company for 2011 by 43% to US$200 million and its 2012 estimate by 47% to US$230 million.
The share price target was upped to 950 pence after the company cleared the previous target of 700 pence, currently trading at 760 pence.
According to Peel Hunt, the soaring palm oil prices should not be viewed as a reuslt of a temporary imbalance in the market as the market fundamentals suggest that the supply/demand dynamics will continue to be favourable for the prices.
The latest data from Oil World forecasts growth in consumption of vegetable oils of 4.7% in 2010/11, way ahead of the estimated supply growth of 3.9%.
The decline in the growth of palm oil supplies is attributed to reduced acreage expansion, the age of oil palms and climatic conditions.
At the same time, Asian demand continues to grow and usage for biofuels is becoming a material driver of growth.
The broker sees the average palm oil price at US$825/tonne in 2010 and US$900/tonne next year, expecting New Britain to sell forward as much as 50% of next year’s volumes in 2010.
The current price stands at US$1,085/tonne.
Unlike New Britain Palm Oil, which has a market capitalisation of £1.15 billion with KBC estimating its enterprise value (EV) at £1.26 billion, smaller companies focused on palm oil don’t get as much attention.
Even though their business has the same level of exposure to the surging palm oil prices, it is debatable whether it is fully reflected in their share price, the broker said.
The AIM listed Equatorial Palm Oil (EPO, LON:PAL) appears to be flying under the radar, widely unnoticed by investors despite the increased attention to the palm oil market. More proof of that came today as shares in Equatorial Palm Oil rose 3% after the note from Peel Hunt highlighted the ongoing developments in the market, while not mentioning the company.
Even though EPO's share price has performed well, it still doesn’t seem to be following the same pattern as palm oil prices or the market value of sector majors.
After conducting a successful initial public offering (IPO) to raise £6.5 million in February this year, the business had a market cap of £14.3 million. The capitalisation has since grown to £25.8 million.
Even those gains largely reflected only the operational achievements of the company, including a non-binding memorandum of understanding to form a significant US$60 million joint venture with major Indian conglomerate Siva Group.
Meanwhile, shares in New Britain Palm oil have doubled in value in 2010, soaring from about 400 pence in January to the current 797 pence with a yearly high of 805 pence.
EPO has a large 169,000 hectare land position, covering three distinct areas - Palm Bay, Butaw and River Cess County. The company intends to plant 50,000 hectares of oil palm over the next ten years, taking production to 250,000 tonnes per annum (tpa).
The strategy sees the scale of plantations double to 100,000 hectares in the longer term.
For comparison, New Britain Palm Oil had nearly 40,000 hectares of estate managed oil palms and sourced fruit from a further 24,000 hectares of independent oil palm growers in 2006.
The company’s production for that year amounted to 235,099 tonnes of crude palm oil.
Equatorial Palm Oil is focused on Liberia in West Africa, a region where the oil palm is indigenous. The company believes that the application of South-East Asian techniques and the latest seed genetics may enable Africa to become a key player in the world palm oil market again.
Major international palm oil producer Sime Darby was developing 220,000 hectares of palm oil and rubber plantations in Liberia as of February.
Equatorial Palm Oil plans to start producing before the end of the current year.