Kenanga Investment Bank (Kenanga), in its latest sector update today (June 28), highlighted a balanced outlook for Malaysia’s plantation industry amid varying fortunes between upstream and downstream operations.
Kenanga anticipates stable CPO prices, averaging RM3,800 per MT throughout CY24, supported by tight supply conditions compared to demand growth. Upstream profitability is expected to improve on robust CPO prices and lower production costs, although downstream sectors face challenges from excess refining capacity and subdued global demand for oleochemicals, except for edible specialty fats.
The sector’s valuation metrics, standing at 1.1x PBV and 16x PER, suggest no overvaluation concerns. Kenanga maintains a NEUTRAL stance on the sector, favouring smaller, high-growth, and upstream-focused planters.
CPO prices remained resilient, underpinned by a supply deficit relative to growing global demand. Throughout CY24, despite seasonal fluctuations, CPO prices edged up 1% QoQ in 2Q, driven by tighter inventory outlooks. Looking ahead, a dip is expected in 3Q as South American soybean harvest concludes, with inventories projected to continue easing into CY25, supported by global demand trends.
Upstream margins have shown improvement as energy and fertilizer prices eased by 15%–35% YoY, complemented by higher palm kernel prices. Despite wage pressures, manageable costs and a flattish CPO price outlook suggest upward pressure on upstream margins by 1%–3% over CY24–25.
Downstream margins are likely to remain weak due to ongoing competition and subdued global economic growth. While some restocking in oleochemicals is noted, demand remains soft, particularly in refining margins due to excess capacity in the region driven by Indonesian integration efforts.
The sector has seen diversification efforts, with larger players venturing into new businesses. For instance, IOI and KLK have expanded into sustainable pulp and paper products and renewable energy initiatives, respectively, aiming to enhance their market presence beyond traditional plantation activities.
Maintaining a NEUTRAL outlook, Kenanga emphasises the essential role of palm oil in global food and biofuel supply chains, supported by robust upstream cash generation and manageable gearing. Despite Shariah compliance and reasonable valuations, the absence of compelling upside catalysts in the near term suggests cautious investor sentiment.
Within the sector, Kenanga favours growth-oriented plays, recommending PPB (OP; TP: RM17.50) for its exposure to essential food sectors in China, India, and Southeast Asia, TSH (OP; TP: RM1.30) for its expansion plans, and UMCCA (OP; TP: RM6.00) for its Indonesian estate maturation.
Kenanga’s insights underscore the dynamic landscape of Malaysia’s plantation sector, balancing opportunities in upstream profitability against downstream challenges amidst global economic uncertainties.
