KUALA LUMPUR (Nov 6): Plantation companies are projected to post higher quarter-on-quarter (q-o-q) earnings in their upcoming quarterly results, thanks to stronger output and improved performance within the oleochemical segment, said Hong Leong Investment Bank (HLIB).

“All planters under our coverage will likely deliver q-o-q earnings growth in their upcoming results season (starting from November 2024),” it said in a note on Wednesday.

The research house noted that fresh fruit bunch (FFB) output has increased across the board, with plantation firms seeing gains of 4.3%-26.5% during the quarter, which is expected to lift the planter’s upstream earnings.

Meanwhile, the sector’s downstream performance, despite facing pressures from Indonesia’s export tax and refining overcapacity, is expected to benefit from heightened oleochemical demand in Europe, as customers replenish inventory ahead of the European Union Deforestation Regulation (EUDR) implementation.

On a year-on-year basis, companies with a larger Malaysian footprint, such as FGV Holdings Bhd (KL:FGV), IOI Corp Bhd (KL:IOICORP), and Hap Seng Plantations Holdings Bhd (KL:HSPLANT), are anticipated to benefit more from improved labour availability, which supports higher productivity.

In contrast, companies with greater exposure to Indonesia may face some productivity setbacks linked to the lingering impacts of the late-2023 El Niño.

HLIB has raised its 2024 CPO price forecast by RM150 per metric tonne to RM4,150, with an expected further increase to RM4,000 per metric tonne in 2025.

This adjustment follows a more-than-10% surge in CPO prices since early October, spurred by weaker output in Malaysia and Indonesia, China’s inventory replenishment; and Indonesia’s upcoming B40 biodiesel mandate in January 2025, which is expected to reduce palm oil stockpiles in Indonesia.

HLIB is maintaining a “neutral” stance on the plantations sector, with a possible review in target prices (TPs) and earnings forecasts in the upcoming results season.

Notably, for every RM100 per metric tonne rise in CPO price assumptions, plantation stocks could see a 3.5%-15% earnings lift, depending on the firm’s production base and market positioning.

Top picks from HLIB include IOI Corp and Hap Seng Plantations, both rated at “buy” calls, with target prices of RM4.22 and RM2.21 respectively.