PETALING JAYA: Plantation companies will likely deliver a good set of results in the fourth quarter of financial year 2024 (4Q24) given better upstream earnings arising from higher palm product prices.
In its 4Q24 results preview, Hong Leong Investment Bank (HLIB) Research said planters with higher upstream exposure in Indonesia are likely to fare better than those in Malaysia, on the back of the shift in cropping pattern at the former.
However, earnings from the downstream segment is likely to remain subdued, particularly in the refining sub-segment, the research house noted.
"This is following the export tax and levy differential between Malaysia and Indonesia, as well as high palm product prices during 4Q24," added HLIB Research.
Zooming in on selective planters, the research house believes that Hap Seng Plantations Holdings Bhd’s 4Q24 earnings will come in sequentially stronger, on the back of higher fresh fruit bunch (FFB) output (up 3.2%) and palm product prices, as well as potentially higher crude palm oil (CPO) sales volume.
It noted IOI Corporation Bhd's (IOI) 2Q25 performance will likely come in higher, as subdued performance at refining sub-segment should be more than mitigated by mildly higher FFB output, higher palm product prices, as well as strong performance at its specialty fats (via Bunge Loders) and oleochemical sub-segments.
HLIB Research also said planters are likely to ink year-on-year (y-o-y) increase in upstream earnings, as higher palm product prices should mitigate broadly the lower FFB output registered by companies under its coverage.
Year to date, CPO price has averaged at RM4,662 per tonne.
The research house said "we maintain our 2025-2026 CPO price assumptions of RM4,000 per tonne and RM3,800 per tonne respectively, with the view that CPO price will stay at elevated levels in the near term (possibly until 1Q25), supported by weak output."
Its current price projections are premised on the assumptions that weather conditions are set to normalise (and even if La Nina does happen, it will be a mild and short-lived one as well as the B40 biodiesel mandate in Indonesia will be implemented on a gradual basis.
HLIB Research, which maintained a neutral stance on the sector said its top buy picks are Johor Plantations Group Bhd at a target price (TP) of RM1.35, Hap Seng Plantations (TP: RM2.44) and IOI (TP: RM4.30) respectively.
Meanwhile, RHB Research in a report said the government's proposal for a fixed mandatory 2% EPF contribution for foreign workers, which is lower than the initial proposed figure of 12%, is positive for the plantation sector.
However, the implementation date has yet to be announced.
"While this would have a negative impact on earnings, our estimates indicate that the extent would not be substantial," RHB Research added. 12%).
Assuming the latest 2% EPF contribution is for both existing and new contracts, HLIB Research said it is positive on this development as the rate will be lower than the statutory rates for both employees and employers, such as 12%.
As such, foreign workers would be taking home RM1,666 (2% comes up to RM34 per month) based on the revised RM1,700 minimum wage.
Additionally, plantation companies would also need to pay an additional cost of at least RM34 per month for each worker, assuming a minimum wage of RM1,700.
Based on the RM1,700 per month minimum wage, HLIB Research said "this additional cost should have a minimal impact on the companies under coverage, i.e. -0.3% to 2% of earnings annually.
"However, this would be a best-case scenario, as harvesters generally are paid sums that are much more than the minimum wage, which means the impact on earnings would be slightly larger," it pointed out.
In addition, if the employer has to absorb the employees portion by raising wages to include the employees’ 2% contribution, the impact could then be even larger, potentially at about 4%-8% per annum.
HLIB Research has kept an "overweight" call on the sector and also made no changes to its earnings estimates on planters for now.
The research house's top picks remained a mix of pure planters and situational plays namely Johor Plantations, Sarawak Oil Palms Bhd (SOP, Bumitama Agri Ltd and Perusahaan Perkebunan London Sumatra Indonesia Tbk PT.