Kenanga Research said with limited earnings growth and upside catalysts, it rates the sector as neutral.
PETALING JAYA: The plantation sector is no longer lagging the valuations of the broader benchmark FBM KLCI, as it trades at some 16 times the price-to-earnings ratio.
But the continued crackdown by the Indonesian authorities to reclaim land nationwide that was used for plantations, mining or other activities inside areas officially designated as forest may impact some planters which are based in Malaysia.
As such, Kenanga Research is expecting the fourth quarter of financial year 2025 (4Q25) earnings of some companies to be impacted by these developments.
The sector’s year-to-date share price gains could come under pressure from these developments.
“It’s possible some may want to take profit while the going is still good in case of any weakening in the Relative Strength Index and the moving average,” a chartist said.
The Indonesian government late last year had tightened regulations and authorised the Forest Area Control Task Force to issue administrative fines for operations without permits in forest zones.
This followed after, back in 2018, Indonesia had launched the “One Map” initiative to unify mapping data of various government agencies onto a single, standardised platform to improve land management matters.
President Jokowi also mandated a review and moratorium on oil palm licensing in that year.
In 2021, a Finance and Development Supervisory Agency audit found, among other matters, that 3.3 million ha of oil palm planting had indeed infringed into protected forest areas, which means they were operating illegally.
It also found out that 16.8 million ha of oil palm have been planted in the Republic based on satellite imagery, although only 7.3 million ha of active plantation had complied with taxes.
Also, the audit discovered 2.5 million ha fell short of compliance, operating only on Izin Usaha Perkebunan or IUP (Plantation Permit), without any Hak Guna Usaha or HGU (Land Cultivation Rights) permit.
Kenanga Research said the coming results season may see fresh provisions relating to Indonesian land disputes, with SD Guthrie Bhd
(SDG) and Genting Plantations Bhd (GenP) having indicated so.
“The overall impact looks contained save for GenP’s relatively large provision compared to its profitability.
“Nonetheless, the overhang on the sector should lift gradually unless further unfavourable policy moves emerge,” it said.
“Core earnings are thus set to be the focus point in the upcoming quarterly reporting season, to which some softness is due but should stay within our expectations,” the research house added.
Kenanga Research said with limited earnings growth and upside catalysts, it rates the sector as neutral.
Commenting on specific company risks on the developments in Indonesia, Kenanga said the bulk of SDG’s Indonesian land was acquired from the Indonesian government itself, from the Badan Penyehatan Perbankan Nasional, or the Indonesian Bank Restructuring Agency.
As such, it notes the group is confident most of its upstream operations in Indonesia are not affected.
“Nevertheless, some areas may be at risk, thus SDG plans to make some provisions in its pending coming quarterly report.
Assuming 500 ha are at risk, a 4Q25 provision by SDG of RM50mil is estimated by Kenanga Research.
