• Upgrade to NEUTRAL from Sell, with new MYR1.15 TP, 0% downside. The plantation industry is at a crossroads. With rising costs, falling yields, and little chance for landbank expansion, is diversification the way forward? Although FGV Holdings is already diversified, with its logistics, sugar, and dairy businesses, its upstream plantation division remains at a loss. We also see no improvements in its ESG credentials for the year. However, as its share price has corrected, we see less downside risk now.

• Face the hard facts, and adapt. With headwinds like lower yields, older trees, environmental pressures, higher costs, labour issues and lower profitability, the sector has to find ways to circumvent these. CPO prices have risen to highs unseen in the last 10 years, but there is always a risk that extenuating circumstances can push prices down to below breakeven cost levels. We expect long-term CPO prices per tonne to be at the higher end of MYR3,000- 3,500 and above (historical average: MYR1,800-2,000), but prices are likely to stay volatile. As this is not within the planters’ control, they need to focus more on revenue growth, cost control and potential diversification efforts.

• Diversification may be the name of the game, going forward. Some planters have already diversified into other industries like property, fruit farming, glove manufacturing and dairy farming. In recent times, we have seen more ESG-friendly diversification like producing wood and fertiliser, etc and 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 if more planters opt to engage. We estimate profitability/ha/year for solar is 26x more than oil palm.

• Other than diversifying earnings, planters will need to increase mechanisation to raise efficiency and reduce their reliance on labour, spend more on R&D to produce better 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 upgrade to NEUTRAL, with a slightly lower TP, following the recent share price correction. However, we trim earnings by c.4% and 9% for FY24F and FY25F, based on lower profit contributions from the logistics division. We also roll forward our SOP valuations to 2025, using EV/ha for plantation and 8x P/E for FGV’s other divisions.

Source: RHB Research - 12 Aug 2024