Earnings growth of 12% forecast for this year

PETALING JAYA: The plantation sector is expected to experience a seasonally slow start to its first quarter of 2025 (1Q25) earnings, despite higher year-to-date (y-t-d) crude palm oil (CPO) prices, according to Maybank Investment Bank Research (Maybank IB).

In a recent report, Maybank IB said it expects the sector’s earnings under its coverage to grow by 12% year-on-year (y-o-y) in 2025, supported by an improved downstream outlook and higher fresh fruit bunch (FFB) output.

It noted that companies with greater exposure in Indonesia such as TSH Resources Bhd, SD Guthrie Bhd, Genting Plantations Bhd and Kuala Lumpur Kepong Bhd (KLK) are likely to benefit from this trend.

However, it cautioned that 1Q25 earnings will likely weaken quarter-on-quarter due to seasonal factors.

“Looking at 1Q25, despite the high y-t-d CPO average selling price (ASP) of RM4,705 per tonne (relative to our RM4,000 per tonne CPO ASP forecast for 2025), it is unlikely to outweigh the seasonally low output cycle of 1Q25, further compounded by January to February’s heavy rainfall in selected states like Johor, Sarawak and Sabah,” it explained.

The research house added that higher costs, including the new minimum wage of RM1,700 per month effective Feb 1, as well as a limited brought-forward stockpile, could further weigh on the quarter’s earnings.

The research house maintained a “neutral” stance on the sector but identified SD Guthrie, Genting Plantations and Sarawak Oil Palms Bhd (SOP) as its preferred stocks.

“Land sales and the Johor-Singapore Special Economic Zone will continue to catalyse interest in SD Guthrie and Genting Plantations, while SOP is simply undervalued,” it said.

Maybank IB noted that plantation players’ earnings were mixed in 4Q24, with 38% of stocks under its coverage exceeding expectations, another 38% missing estimates and 24% coming in line.

However, it highlighted that the sector saw cumulative revenue rise by 6% y-o-y to RM17.52bil, while cumulative core profit after tax and non-controlling interests surged 57% y-o-y to RM1.48bil.

“The strong earnings delivery was mainly buoyed by strong CPO ASP and palm kernel ASPs in 4Q24, driven by the tightness in palm oil supply especially in Indonesia, which was affected by biological tree rest and the lagged impact of 2023’s mild El Nino,” it said.

“The higher prices in 4Q24 more than offset the generally lower y-o-y FFB output growth experienced by the sector.”

Maybank IB said that while upstream performance was better than expected for most planters, KLK and TH Plantations Bhd missed expectations due to “some forward sales committed prior to the CPO price rally towards the year-end”.

“As for the downstream (segment), KLK and IOI Corp Bhd suffered losses.

“This was in part due to fair value losses on derivative financial instruments,” it said.

Looking ahead, Maybank IB expects the downstream outlook to improve, particularly in the oleochemical segment, in 2025.

However, it noted that integrated players such as IOI and KLK would likely continue their usual two to three-month forward sales strategy due to downstream export commitments.

“While such forward sales strategies provide stable margins, the downside is that integrated players will not be able to benefit from high CPO spot prices if Bursa Malaysia Derivatives’ (BMD) CPO Futures price curve continues to be in steep backwardation.

“If BMD CPO Futures price curve stays in steep backwardation, pure upstream players who sell mainly on spot pricing will typically outperform,” it said.