PETALING JAYA: Severe dry weather caused by a strong El Nino weather pattern is expected to lead to significant supply disruptions and a substantial decline in fresh fruit bunch (FFB) yields across Malaysia, particularly in Sabah and Sarawak.
While upstream production volumes are expected to drop, the resulting scarcity is likely to support higher crude palm oil (CPO) prices, creating a favourable tactical environment for equity investors in the plantation sector.
“As palm oil is largely a rain-fed crop, any prolonged deviation in rainfall intensity and distribution could affect crop development, pollination efficiency and fruit formation, ultimately influencing FFB yields,” MBSB Research stated in a plantation sector report.
The research house noted that historical very strong El Nino episodes, such as those in 1997/98 and 2015/16, resulted in lower rainfall, particularly in Sabah and Sarawak.
During the 1997/98 episode, rainfall in Sabah and Sarawak plummeted by 34% and 24% year-on-year, respectively, while Peninsular Malaysia saw a more modest 15% decline.
However, recent data suggest shifting vulnerabilities. While Sabah remained the hardest hit during the 2015/16 El Nino event, with a 14.5% yield contraction, plantations in Peninsular Malaysia have become increasingly sensitive to drought stress, recording a sharp 16% decline in yields during the same period.
These periods were followed by lower FFB yields and palm oil production, with the research house estimating that the impact of the current El Nino will become more pronounced throughout 2027.
Based on historical data, yield recovery was evident across all regions in the following year as weather conditions normalised.
MBSB Research identified Ta Ann Holdings Bhd
(target price or TP: RM6.08) and Sarawak Plantation Bhd (TP: RM3.98) as its top picks, citing their acreage locations and upstream focus, which provide the best protection against drought and the greatest leverage to rising CPO prices.
Integrated planters like SD Guthrie Bhd (TP: RM7) and Kuala Lumpur Kepong Bhd (KLK) were viewed as more defensive options due to the stabilising influence of their downstream operations.
SD Guthrie is favoured for its high exposure to Malaysia-derived FFB production (approximately 54%) and lower earnings volatility stemming from its downstream operations.
With CPO prices expected to rebound by about 21.5% in 2027 as supply tightens, maintaining exposure to these high-leverage, geographically advantaged planters is warranted, MBSB Research added.
The research house therefore maintained a positive outlook on the plantation sector, saying the upcoming climate stress would serve as a key catalyst for earnings growth in 2027.
It noted that supply-side disruptions have historically driven CPO prices significantly higher. For instance, CPO prices rose 75.1% during the 1997/98 El Nino episode and 21.5% during the 2015/16 event.
