• Top Picks: SD Guthrie, Johor Plantations, Sarawak Oil Palms and London Sumatra Indonesia. We believe Budget 2025 is a net negative for the sector, with higher export taxes, higher wages, potential EPF contribution and higher foreign worker levy offset slightly by a higher windfall tax threshold.
   
• Windfall tax threshold raised by MYR150/tonne, but export tax maximum raised to 10%. Effective 1 Jan 2025, the windfall tax threshold will be raised MYR150/tonne to MYR3,150/tonne for Peninsular Malaysia and to MYR3,650/tonne for East Malaysia. The rate remains unchanged at 15%. We estimate the impact to earnings to be between 1% and 4% (Figure 1).

• ...but export tax maximum raised to 10%. Effective 1 Nov, the Government will add more thresholds for CPO export taxes, bringing it up to MYR4,050 (from MYR3,450/tonne). Previously the maximum rate was 8%, but this is now raised to 10%. With this change, net impact for planters (export tax plus windfall levy) would be +MYR4-23/tonne in revenue (<MYR3,800/tonne) but -MYR16-68/tonne in revenue (>MYR3,800/tonne) (Figures 4 and 5). This change, however, raises Malaysia’s competitiveness vs Indonesia (Figure 6).

• Minimum wage raised to MYR1,700, from MYR1,500 (+13%) – effective 1 Feb 2025. Based on our sensitivity analysis, we estimate that every 10% (MYR150/month) hike would impact earnings of the companies under our coverage by -2% to -5% – with the exception of FGV, which has a lower earnings base (Figure 8). As the increase in minimum wage is MYR200/tonne, the impact would be just slightly higher in the region of -3% to -6% pa.

• Employees Provident Fund (EPF) contribution for foreign workers? The Government mentioned plans to make it compulsory for all workers who are non-citizens to also contribute to the EPF – to be implemented in phases. No timing was given nor details on this proposal. Assuming this is implemented, we believe it will be a disincentive for workers to come to Malaysia. Assuming the contribution is 11%, workers would be taking home only MYR1,513 based on the revised MYR1,700 minimum wage. In addition, plantation companies would have to contribute EPF for workers, which based on the current contribution rate is 13% for wages <MYR5,000/month. Assuming the minimum wage of MYR1,700, this means an additional cost of MYR221/month per worker. This will be negative to earnings.

• Multi-tiered levy in early 2025 – aimed at reducing the dependency on foreign workers, with proceeds to be channelled back to the industry for automation and mechanisation. While there are no details yet, it is possible planters could be exempted given the difficulty in hiring locals to work in this job. In any case, we estimate that every 10% hike in foreign worker levy would impact earnings by c.-1% to -2% pa. (Figure 10).

• Still NEUTRAL. We believe Budget 2025 has a negative impact to the sector as the adverse changes (minimum wage, export taxes, foreign worker levy, foreign worker EPF) offsets the small positive adjustment made to windfall tax. We keep our earnings as the net impact is not significant currently.

Source: RHB Research - 21 Oct 2024