The plantation sector's prospects for downstream segments will likely be subdued in the near term due to the overcapacity of refineries in Indonesia and the weak global economy, said Hong Leong Investment Bank Bhd (HLIB).

Despite the improved labour situation, the bank said only Kuala Lumpur Kepong Bhd (KLK) and SD Guthrie Bhd registered positive year-on-year (YoY) FFB output growth.

It said this was due mainly to less favourable weather conditions (particularly in Sabah) during January–February, which in turn affected the productivity of planters with higher exposure in Sabah.

"Performance at the downstream segment, on the other hand, remained weak, mainly on the back of intense competition from Indonesian refiners and weak margins at the oleochemical sub-segment," it said.

HLIB said out of the seven planters under its coverage that reported their quarterly results in May-24, five came in below expectations, while the remaining two (namely Hap Seng Plantations Holdings Bhd and TSH Resources Bhd) came in within.

"Key reasons for the results shortfall during the quarter include lower-than-expected fresh fruit bunch (FFB) production and weaker-than-expected downstream performance," it said in a note.

Meanwhile, HLIB said that despite the mixed YoY FFB output growth trend in the first quarter (Q1) of the calendar year 2024 (CY24), most planters still guided for positive FFB output growth in 2024.

It said this is supported mainly by continuing labour productivity improvement and more conducive weather conditions (since Q2 CY24).

"Crude palm oil (CPO) production cost, on the other hand, is on track to trend lower in 2024, on the back of higher productivity and lower fertiliser prices.

"We maintain our 2024–25 CPO price assumptions of RM4,000/mt and RM3,800/mt and our neutral stance on the sector.

"For exposure, our top picks are IOI Plantation Bhd (buy; target price: RM4.49) and Hap Seng Plantation (buy; target price: RM2.16)," it added.

Click to see the article