Limited upside for plantation stocks

PETALING JAYA: Domestic plantation stocks face limited upside catalysts going into next year, despite the current tightness in the supply of edible oils looking likely to persist into the following year, says Kenanga Research.

It maintained a “neutral” recommendation on plantation stocks, despite the better-than-expected results in the recently concluded earnings reporting season for the second quarter of this year.

About 89% of planters under its coverage met or exceeded expectations versus 78% in the previous quarter, while two-thirds met or surpassed consensus estimates.

The research house noted that while supply for next year “is expected to be better than this year, the increase can only match trendline demand growth of 3% to 4%.

Consequently, 2026 inventory is likely to stay flat year-on-year.

“Crude palm oil (CPO) prices are thus expected to soften moving into next year but will still hold firm as supply remains tight. Our CPO price assumptions are RM4,200 per tonne for this year and RM4,000 in 2026,” it said.

The research house said there was limited downside risk and undemanding valuations but no strong upside catalyst in the sector.

It has an “outperform” recommendation for PPB Group Bhd with a target price of RM10.50 due to recovering earnings.

The research house added that the potential negative impact for Wilmar Internation Ltd from a legal case over palm oil export permits in Indonesia had been priced in. PPB holds a nearly 20% stake in Wilmar International.

“For dividend yields, we suggest Hup Seng Plantations Holdings Bhd with an ‘outperform’ call and target price of RM2.40. For those seeking organic growth over the next few years, TSH Resources Bhd, with an ‘outperform’ call and a target price of RM1.35, is expanding its planted area from 39,000ha currently to between 54,000ha and 55,000ha by 2028 or 2029.

“Meanwhile, United Malacca Bhd’s Indonesian estates are maturing into higher-yielding age brackets and thus expecting an uptrend in fresh fruit bunch (FFB) harvests,” the research house said, adding it has a “outperform” rating and target price of RM6 on the stock.

For the recent earnings reporting season, the research house said upstream earnings broadly rose despite weaker CPO prices due to stronger FFB harvests.

“Downstream would have fared better quarter-on-quarter if not for a very poor performance from IOI Corp Bhd, which reported a rare loss for its downstream operations.

“Non-plantation businesses, such as real estate, renewable energy, and timber reported smaller losses while net interest expenses eased a little on higher interest income,” the research house said.