Key takeaways from our engagement session with Datuk Nageeb (CEO of MPOA) centered around: (i) labour shortage, (ii) CPO outlook, (iii) taxation, and (iv) ESG concerns. To ease the current labour shortage situation (~75k harvester), MPOA is hopeful for the government to allow the intake of ~32k foreign workers (initially approved), which will also translate to higher tax revenue, by virtue of higher production. Efforts to recruit locals are on-going, but attrition rate is high (~60% leaving within a year). Our 2021 CPO production estimate of ~18m MT (-7% YoY) is in line with MPOA’s view. A fund of ~RM60m has been allocated to MARCOP to explore oil palm mechanisation (drones with laser/mechanical harvesters, and exoskeleton systems – arm lifting assist mechanism), but efforts will take time (over the next 5 years). CPO price is expected to remain elevated until early-2022, but no official price forecasts were provided. While MPOA remains hopeful to a certain degree for the government to reassess current tax structure (e.g. higher threshold for windfall tax), this is not our base case. Our base caseassumes nochanges to the windfall taxstructureand threshold. Based on our scenario analysis, every 1% increase in windfall tax (refer to Exhibit 1) @ CY21-22E CPO priceof RM3,700-3,200/MT is estimated to impact earnings of planters under our coverage by 1.3-13.1% (FY21/22E) and 0.3-6.1% (for FY22/23E). With regards to sustainability, we were reassuredthat while sustainable certifications (RSPO, MSPO) are not failproof, they do give buyers some degree of confidence. MPOA has also requested government-to-government (G2G) engagement to resolve the U.S. CBP WROissue. Maintain NEUTRAL with unchanged CY21-22ECPOprice of RM3,700-3,200/MT. Integrated players like KLK (OP; TP: RM23.60) with defensive overall margin against CPO price variability, and GENP (OP;TP: RM8.40) with an upstream laggard and reopening/recovery angle appeal to us.

MPOA engagement. We hosted an engagement session with Malaysian Palm Oil Association’s (MPOA) CEO – Datuk Nageeb Wahab recently. The session was attended by ~20 participants from the investment community. Overall, it was an informative session to understand the palm oil sector’s plight, but resolution remains uncertain. We maintain our NEUTRAL stance on the sector, while our CY21-22 CPO price forecast of RM3,700-3,200/MT remains unchanged for now. Key takeaways from our engagement session are as below.

Labour shortage takes centre stage. Current labour shortage situation has deteriorated to ~75k harvesters (from ~40k harvesters and ~20% loss of yield pre-MCO). We estimate an average ~2k additional worker shortage with each passing month. Efforts to recruit locals are on-going, but attrition rate is high with ~60% leaving within a year. Our 2021 CPO production estimate of ~18m MT (-7% YoY) is in line with MPOA’s view. Meanwhile, MPOA is hopeful for the government to allow the intake of ~32k foreign workers (initially approved), to ease the labour shortage situation. The easing of the labour shortage situation will also translate into higher tax revenue for the government, by virtue of higher production.

Mechanisation and automation efforts will take time. To address the industry’s long-standing reliance on manual and foreign workers, we understand the Mechanisation and Automation Research Consortium of Oil Palm (MARCOP) has been allocated a fund of ~RM60m to explore oil palm mechanisation, especially in harvesting technology such as: (i) drones with laser/mechanical harvesters, and (ii) exoskeleton systems (arm lifting assist mechanism) to reduce harvesters’ arm muscle fatigue during tool lifting and handling. However, the efforts will take time, spanning over the next 5 years.

CPO price to remain elevated. While no official CPO price forecast was provided, MPOA expects CPO price to remain elevated for the rest of 2021 and potentially spilling over into early-2022, given the tight edible oil situation. We are keeping our CY21-22 CPO price forecast unchanged at RM3,700-3,200/MT for now, but recognize that there could be some upside to our CPO price forecasts. On a separate note, with regards to sustainability, we were reassured that while sustainable certifications (RSPO, MSPO) are not failproof, they do give buyers some degree of confidence. MPOA has also requested government-to-government (G2G) engagement to resolve the U.S. CBP WRO issue.

Hopeful for reassessment of current tax structure. MPOA remains hopeful to a certain degree for the government to address the current tax structure, with potentially higher threshold for windfall tax (from current RM2,500/MT in Peninsular; RM3,000/MT in East Malaysia). Having said that, this is not our base case given the government’s plans to increase tax revenue. Our base case assumes no changes to the windfall tax structure and threshold. In our scenario analysis, we outlined the estimated impact to planters under our coverage for every 1% increase in windfall tax (refer to Exhibit 1) @ CY21-22E CPO price of RM3,700- 3,200/MT. Notably, planters most affected are FGV, HSPLANT, TAANN, and UMCCA, coinciding with their higher production concentration in Malaysia – refer to Exhibit 2.

Maintain NEUTRAL on the plantation sector with an unchanged CY21-22 CPO price forecast of RM3,700-3,200/MT. Headwinds such as CPO price volatility and ESG concerns continue to weigh on the sector, but valuations of planters under our coverage and KLPLN index (- 1.5SD from mean) have priced in the bulk of the negatives. Integrated players like KLK (OP; TP: RM23.60) with defensive overall margin against CPO price variability, and GENP (OP; TP: RM8.40) with an upstream laggard and reopening/recovery angle appeal to us.

Source: Kenanga Research - 20 Sept 2021