FGV may see earnings fall over 50pct annually from expanded SST
KUALA LUMPUR: FGV Holdings Bhd is set to take the biggest hit from the upcoming expansion of the Sales and Service Tax (SST), with RHB Investment Bank Bhd estimating the group's annual earnings could plunge by more than 50 per cent.
The firm said the impact on FGV is significant, as about 70 per cent of its processed fresh fruit bunches (FFB) are sourced externally. This could result in a tax burden of over RM430 million annually once the five per cent SST takes effect on July 1.
In a research note, RHB Investment said the expanded tax, covering both upstream and downstream palm products such as FFB, palm kernel oil, palm fatty acid distillate and other by-products, would squeeze margins across the industry.
RHB Investment regional head of plantations research Hoe Lee Leng said the SST expansion comes on top of an already heavy fiscal load for the palm oil sector, which also faces windfall levies, East Malaysia sales tax and export duties.
"The net impact will likely remain negative despite some offset from taxes levied on downstream sales," she said, adding that the firm has downgraded its sector view to "Under Review" from "Overweight".
The new SST will be imposed across a wide range of palm-based products and by-products, dealing a fresh blow to companies already navigating a challenging operating environment.
RHB Investment said companies such as Ta Ann Holdings Bhd, Johor Plantations Group Bhd and Sarawak Oil Palms Bhd could also see profits decline by between four and 11 per cent due to the tax on external FFB purchases.
By comparison, SD Guthrie Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd are expected to experience milder effects, with projected earnings impact ranging from just 0.3 to one per cent.
Despite the near-term drag, the firm is keeping its earnings forecasts unchanged for now, pending further clarification from companies on how the tax will affect their bottom line.
RHB Investment's top stock picks in the sector are Johor Plantations Group Bhd, Sarawak Oil Palms Bhd, SD Guthrie, Bumitama Agri Ltd and PP London Sumatra Indonesia Tbk, citing attractive valuations and relative resilience.
On crude palm oil, the firm said prices may struggle to meet its full-year forecast of RM4,300 per tonne, even with the year-to-date average hovering around RM4,400. A recovery is expected toward the end of the year as production eases seasonally.
Still, the sector outlook remains weighed down by a range of uncertainties from trade tensions and biodiesel mandate shifts to unpredictable weather and policy risks in Indonesia. Environmental scrutiny continues to loom over the industry as well.
Labour, previously a thorny issue, is no longer a major concern, with most companies now reporting full staffing or only minor gaps.
"Until we have better visibility, we are placing our sector rating under review," RHB Investment said, noting that while valuations are undemanding, fiscal pressure and regulatory headwinds are expected to keep sentiment cautious in the near term.
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