RHB Research noted that it saw no signs of tree stress due to the warm weather on a visit to KLK and FGV estates in Sabah recently, with abundant fruits on the oil palm trees.
PETALING JAYA: RHB Research remains “neutral” on the plantation sector, noting that companies such as Kuala Lumpur Kepong Bhd
(KLK) and FGV Holdings Bhd have indicated a strong recovery in productivity in the second half of the year (2H23).
This was despite the fears of the impact the El Nino weather phenomenon would have on the sector, it added.
The research house noted it saw no signs of tree stress due to the warm weather on a visit to KLK and FGV estates in Sabah recently, with abundant fruits on the oil palm trees.
“Both players expect a strong recovery in productivity in 2H23, albeit offset by aggressive replanting activities,” it noted in a report yesterday.
Due to the advanced age profile of the estates in Sabah, both companies are undertaking intensive replanting activities at certain parts of their estates, RHB Research said.
KLK intends to replant more than 3,000 ha of oil palm area for the next three years in Lahad Datu, which will require at least 444,000 seedlings.
FGV, meanwhile, intends to replant 7,000 ha in financial year 2023 (FY23) and another 10,000 ha in FY24 in Felda Sahabat.
Sabah has the highest area of trees above 25 years old in Malaysia, with 12.3% above 25 years and 23.5% aged between 19 and 25 years, the research house stated.
“The current replanting cost to maturity has risen to RM23,000 to RM37,000 per ha from RM18,000 to RM25,000 per ha three years ago, due to the higher cost of fertiliser, labour and planting materials,” RHB Research added.
Furthermore, the high demand for crude palm oil (CPO) means that palm oil mills of both companies were now running at utilisation rates of 40% to 56%, partly also due to the lack of feedstock as a result of ongoing replanting activities in the area.
Demand for palm oil remains strong with refineries of both companies exporting 90% to 100% of output to markets such as Japan, South Korea, the Philippines, Pakistan and India.
RHB Research has made no changes to its earnings forecast for the sector, despite expecting earnings to decline further quarter-on-quarter in the second quarter on lower CPO prices and low productivity.
“While we are currently reviewing our 2024 CPO price assumptions, we continue to prefer the more integrated players with KLK and IOI Corp Bhd as top picks,” it stated.
RHB Research has “buy” calls on KLK and IOI with target prices of RM26.10 and RM4.35 a share, respectively.
