PETALING JAYA: The plantation sector’s equity performance year-to-date is mixed – flat for the large integrated players while smaller upstream players have nudged up the Bursa Malaysia Plantation Index (BMPI) by 3%, according to Kenanga Research.

The brokerage firm said recent earnings of the “Big Three” integrated plantation players namely IOI Corp Bhd, Kuala Lumpur Kepong Bhd and Sime Plantation Bhd have shown poor downstream margins.

Not surprisingly, the sector’s smaller to medium plantation players, which are more upstream-centric, are outpacing their larger peers, it said.

“We also expect upstream margins to improve, albeit slight, over 2024 to 2025 on the back of firm, but flattish crude palm oil (CPO) prices amid easier operating cost environment.

“On the other hand, the outlook for downstream margins is mixed – poor for basic, more commoditised oils and fats (such as basic refining) as well as basic oleochemicals (such as fatty acids and fatty alcohols),” added the brokerage firm.

Although the plantation sector’s quarterly earnings can be volatile, Kenanga Research noted the sector is defensive as palm oil is essential in the global food and biofuel chain.

“Sector gearing is also manageable to very strong, upstream operations are cash flow generative and many planters operate on very valuable land banks,” it said.

Meanwhile, Kenanga Research has maintained the average CPO price assumption of RM3,800 per tonne in 2024.

“Prices are also usually firmer in the first quarter (1Q) and weakest in 3Q due mainly to the harvests of four major oil crops which make up 70% to 80% of the world’s edible oil production – palm, soya, rapeseed and sunflower,” it noted.

Of the crops, prices of soybean oil tend to have lower volatility probably due to the crop having two substantial harvests each year – 2Q in the southern hemisphere (mainly in Brazil) and 3Q in the north mainly in the United States, it explained.

On the other hand, palm oil prices tend to face more pronounced swings.

Partly, its production peaks only once a year (in 3Q) but it is also the most widely traded edible oil in the world, subjecting the prices to various external factors from geopolitical tension to supply chain disruption and weather uncertainties which affect other oil crops.

Furthermore, the global balance of edible oil is expected to stay tight in 2024, potentially up to mid-2025.

“Supply is expected to just about meet demand in 2024 with risk of even coming short. Therefore, 2025 is expected to start the year with lower year-on-year inventory levels or flattish at best.

“While tighter inventory is supportive of even higher prices, it is a tightening from above-trend level in 2023 towards the longer-term average; hence, our assumptions of firm but flattish CPO price of RM3,800 per tonne over 2024 to 2025,” Kenanga Research added.

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