• Top Picks: Kuala Lumpur Kepong (KLK), IOI Corp (IOI) and Wilmar International (Wilmar). Our site visit to KLK’s and FGV Holdings’ (FGV) plantation-related facilities in Sabah was rewarding, as we gained first-hand knowledge of their plantation operations. Overall, we saw no signs of tree stress, with both players expecting a strong recovery to productivity in 2H23, albeit offset by aggressive replanting activities. Maintain sector NEUTRAL.

• The whole spectrum, from upstream to downstream. We recently took clients on a 4-day trip to Lahad Datu, Sabah to visit a few plantation-related facilities, including KLK’s refinery, estates, mill and nursery as well as FGV’s estates, mill, nursery, refinery, biomass power plant, and jetty at the Felda Sahabat complex. The site visit enabled us to have a first-hand look at both upstream and downstream segments of the palm oil plantation, covering the whole workflow - from nursery, estate and mill to refinery and replanting as well as logistics, workers’ housing and schools.

• No signs of tree stress so far. We understand that both the KLK and FGV estates we visited are still seeing enough rainfall despite the hot weather, with no major signs of visible tree stress. Both companies’ estates were muddy and wet when we arrived, indicating that the area had recently experienced rainfall, while the fruits on the trees looked abundant.

• Low utilisation rates in the upstream segment. CPO mills of both companies that we visited are currently running at low utilisation rates of 40- 56%. This is due to lack of feedstock (FFB) as a result of ongoing replanting activities in the area. Sabah has the highest area of trees above 25 years old in Malaysia, with 12.3% above 25 years and 23.5% aged 19-25 years.

• Heavy replanting in progress. Both companies that we visited have their own nurseries to ensure a sufficient supply of seedlings, as they are intensively undertaking replanting activities at certain parts of their estates. KLK intends to replant more than 3,000ha of palm oil area for the next three years in Lahad Datu, which will require at least 444k seedlings. FGV is planning to replant 7,000ha in FY23 and another 10,000 ha in FY24 in Felda Sahabat. We note that the current replanting cost to maturity has risen to MYR23-37k/ha from MYR18-25k/ha three years ago, due to the higher cost of fertiliser, labour and planting materials.

• Targeting the export market. Refineries of both companies that we visited mainly export their products, with 90-100% of output shipped to countries like Japan, Korea, the Philippines, Pakistan and India. We note that FGV only sources CPO internally, as there are seven mills within Felda Sahabat while KLK only has one mill that is operational in Lahad Datu – so it sources CPO both internally and externally.

• No change to our NEUTRAL sector weighting. Post site visit, we made no changes to our earnings forecasts and NEUTRAL sector weighting. We expect sector earnings to decline further QoQ in 2Q23, on lower CPO prices and weak productivity. While we are currently reviewing our 2024 CPO price assumptions, we continue to prefer the more integrated players with KLK, IOI Corp, Wilmar and Golden Agri as Top Picks.

Source: RHB Research - 6 Jul 2023