• Stay BUY, with new MYR3.25 TP from MYR3.30, 17% upside and c.4% FY25F yield. The plantation industry is at a crossroads. With rising costs, falling yields, little chance for landbank expansion, where can growth come from? As Sarawak Oil Palms’ EBIT/ha is already better than its peers, it may be able to improve this by expanding further downstream and raising its ESG credentials. We continue to like the company for its attractive valuation of 8x P/E, at the lower-end of its peer range of 6-10x.

• Face the hard facts and adapt. With all the headwinds facing the industry in the form of lower yields, older trees, environmental pressures, higher costs, labour issues and reducing profitability, the plantation industry needs to find ways to circumvent this. Although CPO prices have risen to highs unseen in the last 10 years, there is always a risk that extenuating circumstances can push prices down to below breakeven cost levels. Going forward, we expect long term CPO prices to trade at higher levels of MYR3,000-3,500/tonne and above, but prices are likely to continue to be volatile. As prices are not within the planters’ control, they will need to pay closer attention to revenue growth, cost control and potential diversification efforts.

• Diversification may be the name of the game going forward. Historically, some planters have already diversified into other industries like property, fruit farming, gloves and dairy farming, amongst others. In recent times, we have seen more ESG-friendly diversification in the form of producing wood, fertiliser, etc using palm oil waste. However, other than ventures that take advantage of their landbank like land sales and property development, none of these have moved the needle in terms of earnings contributions. With landbank monetisation like data centres or renewable energy ventures like solar farms now being a feasible diversification, this may change going forward should more planters opt to engage. We estimate profitability/ha/year for solar is 26x more than oil palm.

• Besides earnings diversification, planters also need to improve mechanisation to raise efficiency and reduce reliance on labour; spend more on R&D to produce better breeds of seedlings with higher yields and lower maintenance costs; and boost emphasis on ESG to get a higher ESG premium.

• For SOP, we raise its ESG score to 2.3 (from 2.2), coming from a 6-8% reduction in water intensity and greenhouse gas emissions. This, in turn, has increased its “Environment” rating. We believe the sector is also moving in the right direction in terms of ESG standards, with more disclosure and more targets being set. Our overall average sector ESG score has improved this year to 2.6 (from 2.5).

• Maintain BUY, with a slightly lower MYR3.25 TP, after raising FY25F earnings by 3%, following a slight reduction in operating expenses. We roll forward our valuation target to 2025, raising our P/E to 11x from 10x, in line with its historical valuation average. Our TP also imputes a lower 14% ESG discount (from 16%), given its ESG score of 2.3.

Source: RHB Research - 12 Aug 2024