Investment Highlights

• Only a few listed durian companies in Malaysia. In this report, we look at the durian industry in Malaysia. There are 3 listed companies involved in durian activities on Bursa Malaysia. They are PLS Plantations, DSR Taiko (listed on Leap Market) and Matang. Out of the 3, DSR Taiko and Matang are profitable. We believe that Matang’s earnings are mainly driven by palm oil as its durian plantations are still young. PLS Plantations recorded a net loss of RM4.1mil due to lower palm product prices and higher upkeep/maintenance expenses. DSR recorded a net profit of RM1.3mil in 1HFYE6/24. The main durian players in Malaysia are unlisted companies such as Hernan Plantation, Sindiyan Group and Top Fruits.

• Long gestation period. Durian trees take many years to mature and reach peak yields. We believe that durian plantations only turn profitable after 8 years of planting.

• Yield cycle is long. Durian trees take 5 years to mature. At the peak, the tree can produce more than 100 durians a year compared to 20 durians in the 1st year of maturity. Durian trees reach peak yield from Year 20 to 40. Durian trees can last for more than 100 years. Hence, there is little need for replanting.

• Challenging to plant durians. Durian cultivation is challenging as the trees are prone to diseases and changes to weather conditions. In addition, farmers must be diligent in applying fertiliser and managing water levels. We believe that the major cost components are labour and fertilisers. We reckon that the cost of maintenance is RM20,000-RM25,000/ha per year.

• Pahang is Malaysia’s main durian producer. The main producers of durians in Peninsular Malaysia are Pahang, Kelantan and Johor. They account for more than 60% of durian production in Peninsular Malaysia. Most of the durian plantations in Pahang are in Bentong and Raub. Bentong, Raub and Balik Pulau in Penang are suitable for durian plantations due to their slopy terrains. Durians are best planted in slopy areas that are less than 30 degrees.

• Supply affects durian prices. Like other commodities, selling prices of durians depend on market forces of demand and supply. Hence if the weather is too dry, durian supply will fall and prices will rise. According to Statista, average selling price of D24 in Malaysia ranged from RM9.95/kg to RM30.10/kg from 2014 to 2022.

• Malaysia’s exports of fresh durians to China will take time. The long-term prospects of the durian industry are positive due to export opportunities to China. In June 2024, Malaysia received approval to export fresh durian fruits to China. Previously, Malaysia was only allowed to export pulp, paste and frozen fruits to China. Applications for approved permits to export fresh durians to China will be audited by the General Administration of Customs of China in September. Currently, more than 90% of durians produced in Malaysia are consumed domestically. Also, supply is constrained due to the scarcity of suitable land and the long gestation period of the durian tree. It is estimated that there are 85,000ha-90,000ha of planted areas in Malaysia compared to 180,000ha-200,000ha in Thailand. Most of the durian plantations in Malaysia are owned by smallholders with blocks of land smaller than 10 acres.

• Convert ageing oil palm to durians? IOI Corporation has 28ha of durian plantations in Johor as of end-FY23. There is potential for plantation companies to convert ageing oil palm trees into durian estates if the terrain and soil are suitable. ESG requirements for durian plantations are also less stringent than palm oil. Only issue is the long payback period for durians. It takes oil palm trees only 3 years to mature compared to 5 years for durians. Durian trees only reach peak yields from 20 years onwards.

• Planters are interested in solar currently, not durians. Instead of durians, we believe that plantation companies are focussing on solar development currently. The payback period for a solar farm is shorter than durians and we think that it is easier to manage a solar farm instead of a durian estate. Recall that SD Guthrie has proposed to build a solar farm next to its Kerian Integrated Industrial Park in Perak. The group is also bidding for a LSS5 project.

• Oil palm planters are preparing for EUDR. In the meantime, we reckon that large plantation companies are focusing on being ready for the EUDR (EU Deforestation Regulation), which will be implemented at the end of this year. Under the EUDR, exporters must produce documentation and evidence that their products are free from deforestation. Looking ahead, other challenges for the sector include a hike in minimum wage and implementation of the multi-tiered workers’ levy.

• 2024E CPO price assumption is unchanged at RM4,000/tonne. We are keeping our average 2024E CPO price assumption of RM4,000/tonne for pure Malaysian companies. Average MPOB spot price was RM4,014/tonne in 7M2024. We believe that CPO prices would soften in 2H2024 due to the peak production period.

• Neutral on plantation sector. We have selective BUYS on a few plantation companies due to the attractive age profile of their oil palm trees and leverage to CPO prices. We recommend BUYs on KL Kepong (FV: RM25.20/share), Genting Plantations (FV: RM6.80) and Hap Seng Plantations (FV: RM2.40).

Source: AmInvest Research - 6 Aug 2024