Kim Eng Securities downgrades Wilmar (F34.SG) to Hold from Buy and cuts its target price to $6.24 from $7.20 (based on 15x FY11 P/E vs 18x FY10 P/E previously).

Flags the risk of margin compression given higher raw material costs due to rising prices of CPO and soybeans.

“The company is a net buyer of both, which feeds into its downstream edible oils and fats business. Depending on Wilmar’s purchase prices, this can impact margins significantly.”

Kim Eng says the plantation group may also be restrained in passing higher costs to consumers due to China’s price controls on food staples. The shares are up 0.7% at $5.95.