Foreign Labour in Malaysian Oil Palm Industry

Does the labour shortage really impact PO productivity?

Issue on labour shortage is not new to the industry and has been actively debated by the industry since way back in 2008. From what we have gathered from industry players, the labour shortage issue has not been really significant to private estates (public listed company), but if the problem prolongs, the impact will be severe beginning next year. The industry fears that the shortage in labour will hurt palm oil production this year by delaying the harvesting and collecting of fresh fruit bunches (FFB), and hence, impact productivity and the quality of CPO produced. Our view is that the issue of productivity is dependent on how companies manage their labour within their means through best estates management practices – and this can meaningfully be applied by private plantation companies and not smallholders. Thus, successful plantation companies in our view are those who achieve impressive yield growth not just by using the right seeds for replanting and/or new planting, but also adopting best management practices, inter-alia in 1) fertiliser planning, 2) labour planning such as harvesting round planning, mechanisation and FFB collecting, and 3) efficiency in delivering the FFB to mills.

Tight supply set to keep CPO prices supported

We predict that near-term CPO price increases could be capped by the narrowing of the price differential between CPO and SBO in CBOT, but the anticipation of tight supply of global vegetable oil and strong demand from China dictates potentially higher prices going forward, possibly up until 1Q2021. We predict that average CPO price for 2020 could reach as high as RM2,600/MT to RM2,700/MT higher than our forecast of RM2,500/MT but maintain our forecast for now as there might be some pull-back in CPO price. Although CPO price (local delivery) is currently traded at RM3,304/MT, we are of the view that the upside is limited due to 1) the recent increase in Covid-19 cases, 2) lower crude oil prices, 3) lower biodiesel usage in Indonesia due to insufficient CPO levy and government funds for mandate, 4) unsettled US-China trade-dispute irregardless who wins the US presidency, and 5) slower global economy, which would cause demand to stay moderate.

Neutral call on sector retained

A higher palm oil products prices would not benefit plantation companies if it is not accompanied by higher production and demand. All in, we are of the view that high operational costs and suppressed profit margin on lower-than-expected production and sales volume would continue to be key risks to planters’ earnings. We expect performance of pure plantation companies to be favourable given current high palm products prices, provided production progress well. Nonetheless, there might be profit margin squeeze for downstream players due to higher feedstock price and keen competition especially from petrochemical products that will impact demand, hence affecting sales volumes of bio-based products. We have BUY call on TSH (RM1.23), SOP (RM4.30) and Sarawak Plant (RM1.94) whilst retaining HOLD recommendation on KLK (RM23.10), IOI (RM4.80), GENP (TP: RM10.00), FGV (TP: RM1.04), SDPL (TP: RM4.83) and HAPL (TP: RM1.66); whilst non rated for TH Plant. Maintain Neutral on the sector

Source: BIMB Securities Research - 9 Nov 2020