According to a news portal, Nanyang Siang Pau, the Ministry of Human Resources has planned to table a proposal of raising the minimum wage from RM1,500 to RM1,700 or an increment of 13.3% based on the National Wages Consultative Council Act 2011. We think this would have a mild impact on the plantation sector in terms of higher production costs. We understand that local plantation companies could see their operating costs increase by up to 3%. Maintain Neutral on the sector outlook with a full-year CPO forecast of RM3,800/mt.

• Proposal of a minimum wage hike. It is understood that the Ministry of Human Resources has tabled a proposal of hiking the minimum wage from RM1,500-RM1,700 ahead of the upcoming Budget 2025. It is a relief for the employers, as the proposed rate is at the low end of the earlier expectation of RM1,700-RM1,800. Previously, the government reviewed the minimum wage in May 2022, increasing it from RM1,200 to RM1,500.

• Accelerating automation and mechanisation developments. We believe the progressive minimum wage hike would push industry players to allocate more capex for automation on more work processes to reduce the number of headcounts going forward. Eg, robotic arms, drones and specialized machinery can carry out manual work more efficiently. It can also help reduce the high dependency on foreign workers, in which the new hiring quota remained frozen. However, harvesting work is the most difficult skill to be replaced by machines. Alternatively, we gather that some industry players are gradually converting the hourly-pay general workers to a piece rate-pay basis, which would see the worker pay rated on a performance basis. This will also help drive the entire group’s productivity commensurate with higher pay.

• A mild impact on the palm oil industry. The labor-intensive palm oil plantation in Malaysia- the world’s No.2 palm oil producer, which employs almost half a million workers, could see a small financial hit in response to the minimum wage hike. Following our channel checks, we gather that local plantation companies could see their operating costs increase by up to 3% as general workers (security personnel, admin clerks, carpenters, drivers, mechanics) who fall under the current RM1,500 wage bracket, generally made up about 15%-20% of the total workforce. It will also have knock effect on higher wage brackets. Nevertheless, the impact could be muted if it could translate into higher productivity. Malaysia’s FFB yield has been on the uptrend this year with a 12% increase to 10.82m mt for the first 8 months and likely to reach close to 17m mt for the full-year compared to 2023’s 15.79m mt.

Source: PublicInvest Research - 13 Sept 2024