Strong 2Q showing forecast for planters

PETALING JAYA: Plantation companies will likely report another decent set of performance on a quarter-on-quarter (q-o-q) basis in the upcoming second quarter of financial year 2025 (2Q25) results season, despite anticipation of mixed sequential improvement.

Hong Leong Investment Bank (HLIB) Research in its 2Q25 results preview expects planters’ performance to be supported by a recovery in the fresh fruit bunch (FFB) output amid relatively stable palm oil prices.

On a q-o-q basis, the brokerage firm expects plantation companies under its coverage to record FFB output growth ranging from 3.5% to 46%, driven primarily by seasonal factors and more conducive weather conditions.

“Despite the broad-based increase in FFB production, upstream earnings performance was likely mixed, as the output growth registered by some of the planters (such as TSH Resources Bhd and Hap Seng Plantations Holdings Bhd) were not sufficient to mitigate the q-o-q decline in crude palm oil (CPO) prices and the full cost effect of the minimum wage hike implemented since February 2025,” it pointed out.

On the other hand, downstream segment earnings are expected to improve sequentially.

“This will be supported by a narrower export tax and levy differential between Malaysia and Indonesia, and lower feedstock costs, particularly for both CPO and crude palm kernel oil,” added HLIB Research. On a year-on-year (y-o-y) basis, the brokerage firm expects planters to report flattish upstream earnings in 2Q25, as broadly higher FFB output – amid flattish CPO prices – is likely offset by higher labour costs following the minimum wage hike implementation.

“During the quarter, seven out of eight planters under our coverage recorded y-o-y increases in FFB output, primarily driven by yield normalisation,” the brokerage firm said.

Note that some planters were impacted by biological tree stress and a shift in cropping patterns last year.

As for downstream segment earnings, it could potentially weaken in 2Q25 due to the high earnings base effect CPO export tax and duty differential between Malaysia and Indonesia, along with high palm kernel prices, which will likely curtail margin for oleochemical products.

HLIB Research has maintained its 2025-2026 CPO price assumptions of RM4,200 per tonne and RM4,000 per tonne, respectively.

It said ample near-term supply of vegetable oils (in particular, CPO and soybean) will cap the near-term CPO price (possibly until 3Q25), before turning more upbeat in 4Q25.

Year-to-date, the CPO price has averaged at RM4,342 per tonne.

The brokerage firm has kept a “neutral” stance on the plantation sector due to the lack of significant near-term CPO price re-rating catalysts.

For exposure, its top “buy” picks are IOI Corp Bhd with a target price of RM4.12 and SD Guthrie Bhd with a target price of RM5.15.

Meanwhile, HLIB Research has ceased coverage on FGV Holdings Bhd, as the Federal Land Development Authority’s stake in FGV had exceeded the minimum 90% threshold and its listing status will be withdrawn from the Main Market of Bursa Malaysia.

“As such, our earnings forecasts, target price of RM1.30 and ‘hold’ rating should no longer be used as a reference going forward,” it noted.