13/05/2025 (Business Today) - Hong Leong Investment Bank Bhd (HLIB) has maintained its NEUTRAL stance on the plantation sector, expecting a mixed set of results for the first quarter of 2025.

The house believed that while planters are likely to post better year-on-year earnings on the back of elevated palm product prices, quarter-on-quarter performance will likely be weaker due to seasonally lower output and softer palm oil prices.

HLIB maintained its BUY calls on SD Guthrie (TP: RM5.17), IOI Corporation (TP: RM4.24) and Jaya Tiasa Holdings (JPG) (TP: RM1.35) as top sector picks, while FGV and TSH Resources remain on HOLD.

According to HLIB analysts, crude palm oil (CPO) prices remained relatively firm during the quarter, supporting upstream profitability on a year-on-year basis. However, all planters under coverage recorded negative fresh fruit bunch (FFB) output growth, ranging between -4.9% and -27.7%. The decline was attributed to seasonal cropping patterns and excessive rainfall in parts of Malaysia, which disrupted harvesting activities.

Planters with greater upstream exposure in Indonesia are expected to outperform their Malaysian counterparts, benefitting from a different cropping cycle and fewer weather-related disruptions. In particular, TSH Resources recorded the smallest drop in FFB output at -4.9%, aided by recovering yields in Indonesia and the resolution of localised social disputes.

Hap Seng Plantations, on the other hand, saw its FFB output fall 11.3% year-on-year in 1Q25 despite a 19.1% month-on-month recovery in March. HLIB flagged the risk of a potential shortfall in the group’s FY25 output guidance of 725,000 tonnes, citing flood-related disruptions during the early months of the year.

While upstream performance is set to improve year-on-year, HLIB expects the downstream segment to remain under pressure. This is largely due to an unfavourable export tax and levy structure between Malaysia and Indonesia, coupled with elevated input costs which may weigh on margins and demand.

Year-to-date, the average CPO price stood at RM4,579 per metric tonne, although spot prices have eased over 20% to RM3,781 per metric tonne amid improving global supply prospects. HLIB maintained its average price forecasts of RM4,000 per metric tonne for 2025 and RM3,800 for 2026, anticipating that Indonesia-led supply recovery will cap further upside in palm oil prices.

In light of the absence of near-term demand catalysts and ongoing margin pressures in the downstream segment, HLIB continues to advise a balanced exposure to the sector, focusing on names with more resilient earnings outlooks and efficient cost structures.

https://www.businesstoday.com.my/2025/05/13/output-concerns-for-the-plantation-sector/