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PETALING JAYA: The plantation sector's outlook stays constructive as crude palm oil (CPO) prices are expected to remain underpinned by Indonesia's B50 biodiesel mandate, firm energy prices and resilient demand from India, according to TA Research.
Still, stronger seasonal output and competitive soybean oil prices are likely to cap further gains in the near term.
Fresh fruit bunch (FFB) production is projected to improve seasonally in the second half of financial year 2026 (2H26), though the recovery is expected to vary across planters.
Looking further out, the research house flagged the El-Nino weather pattern as a growing supply risk heading into 2027, particularly in Indonesia, given the typical lag between dry conditions and their effect on yields.
Higher fertiliser costs could weigh on production economics, while downstream margins are set to remain mixed amid excess refining capacity and aggressive Indonesian competition.
Uncertainty surrounding Indonesia's new commodity exchange and export oversight framework may also inject volatility into palm oil trade flows until final regulations are clarified.
'Taken together, we expect CPO prices to stay firm into 2027, with stronger biodiesel demand and weather-related supply risks partly offset by improving near-term production,' TA Research said.
Reviewing the sector's second quarter of financial year 2026, the research house said results were broadly in line with expectations, with every company under its coverage meeting estimates except United Malacca Bhd.
Overall sector earnings improved despite generally softer year-on-year (y-o-y) CPO prices, supported by better production volumes, stronger downstream contributions and operational improvements at selected companies.
IOI Corp Bhd benefited from stronger upstream and downstream operations, while Kuala Lumpur Kepong's (KLK) core performance lifted on resilient plantation earnings and a sharp rebound in manufacturing.
SD Guthrie also delivered a stronger quarter, aided by improved downstream margins, higher CPO output and firmer realised palm product prices, although 1H26 upstream earnings were pressured by softer prices and weaker FFB volumes.
Kim Loong Resources Bhd's softer plantation contribution was more than offset by robust milling earnings, driven by higher CPO sales volumes, improved processing efficiency and better margins.
Performance remained uneven among smaller-cap planters. TSH Resources Bhd staged a strong sequential recovery on lower operating expenses and improved extraction rates, but year-on-year earnings were still weighed down by softer CPO prices and lower sales volumes.
United Malacca was the only name under coverage to miss expectations, hurt by weaker FFB output, lower palm oil prices and higher production costs.
Cumulatively, 1H26 sector core earnings rose 3.5% y-o-y, reflecting that earnings are increasingly driven by production recovery and operational execution rather than CPO price appreciation alone.
The research house reiterated its 'overweight' call on the plantation sector, anchored on a 2026 average CPO price assumption of RM4,300 per tonne.
It maintained 'buy' ratings on KLK with a target price (TP) of RM24.64, IOI Corp (TP: RM5.36), United Malacca (TP: RM7.03) and Kim Loong (TP: RM2.82).
During the results season, TA Research lifted TSH to 'buy' from 'hold' on improved risk-reward following recent share price weakness, while downgrading SD Guthrie to 'hold' from 'buy' on valuation grounds after the stock rallied 23% since its March upgrade.
'We believe the improved CPO outlook, stronger downstream performance and continued land-value unlocking are now largely reflected in its valuation,' the research house added.
Separately, an analyst at a local research house identified IOI Corp and KLK as her top picks. She favours IOI for its improving financial year 2027 upstream earnings visibility, supported by mid-single-digit FFB growth, a rising oil extraction rate and firm CPO prices.
KLK, she added, offers a broader earnings recovery story underpinned by improving estate productivity, continued manufacturing recovery, higher contributions from associate company Three and a substantially reduced overhang from its UK-listed associate Synthomer plc.
Source: The Star