PETALING JAYA: As this year’s El Nino weather phenomenon becomes more severe, a number of issues ranging from yield to sustainability practices have come under increasing focus for oil palm players.
Kenanga Research has downgraded plantation stocks to a “neutral” from “overweight”, calling for a tactical pause with the KL Plantation Index having performed better than the broader market over recent months.
The research house expects higher input costs such as fertiliser prices and a hike in minimum wage to drag profitability lower for a year or two.
“The haze since August is evident of droughts and wildfires in Sumatra and Kalimantan, Indonesia. The dryness is expected to prevail for another three to six months and its full impact on lowering palm oil yields is often felt 10 months thereafter, or early second-half 2027,” it said, adding that it expects palm oil production to dip by 4% year-on-year in 2027.
Kenanga Research noted that plantation stocks’ price to book value (PBV) of 1.3 times comes in at the upper end of the longer term PBV band of 0.9 times to 1.5 times over three to 10 years. While not overly demanding, it pointed that this “is up from 1.2 times PBV a quarter ago, which is also the three-year average”.
Top picks include IOI Corp Bhd
for its strong team and leading return on equity among peers, with a target price (TP) of RM5.40, and Kuala Lumpur Kepong Bhd for its earnings sensitivity to crude palm oil (CPO) prices, with a TP of RM25.80. Both have “outperform” calls.
Meanwhile, the research firm has an “outperform” call on PPB Group Bhd with a TP of RM13.40, given its longer-term recovery at decade low valuation. Kenanga Research also has an “outperform” call and RM3 TP for Hap Seng Plantations Holdings Bhd on higher dividend potential.
Other planters include United Malacca Bhd which, with a TP of RM7 and an “outperform” call, offers value growth amid still-maturing estates, and TSH Resources Bhd with a TP of RM1.85 and an “outperform” call for its CPO price sensitivity and ongoing 40% expansion in new planting.
MBSB Research maintained a tactical “positive” stance on plantation stocks, with an average CPO price target of RM4,400 per tonne. It has kept a “buy” call on SD Guthrie Bhd with a TP of RM7.65.
“The haze puts palm oil sustainability back under scrutiny. Dryness leaves land more vulnerable to fires, while any illegal burning outside planted areas could worsen the haze and put the wider palm oil industry back under scrutiny.”
It said the discussion should go beyond the potential benefits of firmer CPO prices to how well sustainability implications can withstand a recurring haze. “In our view, this puts estate-level fire prevention and response capabilities under closer scrutiny, particularly in peat areas vulnerable to prolonged dryness.
“This makes water-table management, hotspot monitoring, firefighting readiness and zero-burning practices critical during prolonged dryness.” MBSB Research noted that SD Guthrie monitors areas within 5km of its Indonesian estate boundaries and deploys over 50 drones.
Based on channel checks, planted peat accounts for approximately 2.29% of IOI’s acreage, 2.23% for Johor Plantations Group Bhd and below 10% for Genting Plantations Bhd, with substantially higher exposure among Ta Ann Holdings Bhd and Sarawak Plantation Bhd.
“While Malaysian Sustainable Palm Oil, Indonesian Sustainable Palm Oil and Roundtable on Sustainable Palm Oil certification provides some assurance on these safeguards, their effectiveness ultimately depends on implementation on the ground,” the research house said.
