• Keep BUY, with new MYR26.15 TP from MYR23.00, 25% upside and c.2% FY25F (Sep) yield. As the sector is at a crossroads with rising costs, falling yields, little chance for landbank expansion, is diversification the way forward? Kuala Lumpur Kepong would be a potential winner, given its stronger R&D divisions and more sizeable land for development of renewable energy (RE) projects, real estate and land sales. It is trading at an attractive 21x FY25F P/E, vs its peer range of 18-35x.

• Face the hard facts and adapt. With headwinds like lower yields, older trees, environmental pressures, higher costs, labour issues and reducing profitability, the sector has to find ways to circumvent this. CPO prices have risen to highs not seen in the last 10 years, but 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 be at higher levels of MYR3,000-3,500/tonne and above, but these prices are likely to continue to be volatile. As they are not within the planters’ control, companies will need to pay a lot 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 areas like property, fruit farming, gloves and dairy farming, amongst others. In recent times, we have seen more ESG-friendly diversifications 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.

• Other than diversification of earnings, planters will need to increase 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 put more emphasis on ESG to attain ESG premiums.

• We believe the sector is 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).

• We raise ESG ratings for KLK to 3.2 (from 3.0), given improvements in its GHG intensity, energy efficiency and certification and traceability progress.

• Maintain BUY, with a new MYR26.15 TP, after rolling forward our valuation targets to 2025F. We maintain our 20x target P/E, in line with its historical valuation average, and impute a 4% ESG premium – given its ESG score of 3.2 (from 3.0) – to derive our TP. We make no changes to our forecasts.

Source: RHB Research - 12 Aug 2024