• Still BUY, new SOP-based MYR4.45 TP from MYR4.30, 19% upside and c.3% FY25F (Jun) yield. The plantation industry is at a crossroads, with rising costs, falling yields, and little chance for landbank expansion. Planters are forced to do a lot more to boost their bottomlines – is diversification the key? IOI Corp could be a potential winner, given its stronger R&D division and sizeable landbank. It is currently eyeing suitable areas in two states for renewable energy (RE) development or as a source of rental income. Valuations are attractive at 18x FY25F P/E vs its peer range of 18-22x.

• 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 planters’ control, they 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 diversified into other industries like property, fruit farming, gloves, and dairy farming. In recent times, we have seen more ESG- friendly diversifications, such as the production of wood and fertilisers, using palm oil waste. However, other than ventures that take advantage of their landbanks, 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 RE ventures like solar farms now being a feasible diversification, this may change going forward, if more planters opt to engage. We estimate profitability/ha/year for solar to be 26x more than oil palm.

• Other than diversifying 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 disclosures and more targets being set. Our overall average sector ESG score has improved this year to 2.6 (from 2.5).

• Our TP rises to MYR4.45 after rolling forward our valuation targets to FY25F (from FY24F) and imputing a 0% ESG premium/discount. We keep our 20x target P/E for the plantation division, in line with its historical valuation averages and make no changes to our earnings forecasts.

Source: RHB Research - 12 Aug 2024