Diversification paying dividends
PETALING JAYA: Integrated plantation companies in Malaysia are poised to record more non-plantation related earnings moving forward, given the emergence of new earnings drivers, analysts say.
According to Kenanga Research, PPB Bhd, SD Guthrie Bhd and Genting Plantations Bhd are among the planters that are already seeing early non-plantation earnings for 2025 and 2026.
In recent years, many large integrated planters had been getting involved in sectors such as renewable energy (RE), industrial parks, real estate, fast-moving consumer goods (FMCG) and net-zero bio-products as part of efforts to diversify earnings.
'While still early (and small), non-plantation earnings are set to grow, especially among larger planters.
'This could enhance and sustain longer-term earnings growth, thus helping preserve the sector's defensive cash flows and balance sheets,' said the research house in a report yesterday.
Kenanga Research also highlighted that SD Guthrie's two new segments – development of industrial parks and renewable energy – were underpinned mostly by having well located land, established business connections and access to financing if required.
In real estate, Sime Darby Bhd and IOI Corp Bhd started developing townships back in the 1970s and 1980s that have grown to such a size that their property arms are now separately listed.
The current focus is on industrial parks in the case of SD Guthrie and Kuala Lumpur Kepong Bhd , while Genting Plantations just opened another premium outlet and is venturing into residential developments in Greater Jakarta, Indonesia, the research house said.
Meanwhile, solar power started to gain traction a decade ago with planters such as SD Guthrie, which leased out unproductive land to solar farms in 2017.
In the FMCG sector, Kenanga Research said larger planters have invested downstream into the manufacture of rubber products, edible oil refining and oleochemicals.
PPB and FGV Holdings Bhd , for example, ventured into food-related FMCG products such as cooking oil, margarine and even bread production.
While FGV is Malaysia-centric, PPB and its associate Wilmar International Ltd have a sizeable Asia-Pacific presence.
Wilmar's Arawana and Fortune brands are among the leading edible-oil names in China and India, while PPB is Malaysia's largest flour miller and Massimo is the country's number two bread brand.
As for net-zero bio-products, IOI's investments of about RM150mil in IOI Palm Wood Sdn Bhd and estimated RM250mil in a joint venture with Nextgreen Global Bhd resembles the direction undertaken by Stora Enso, Borregaard or Metsa in Scandinavia.
'Essentially, we suspect IOI is seeking to maximise value from oil palms beyond just extracting and selling the crude palm oil (CPO) and palm kernel, while keeping its additional environmental footprint to the minimum to ensure long-term sustainability for its entire oil palm operations,' the research house added.
Commenting on CPO prices, Kenanga Research said it expects the near term outlook for this year and next is for prices to hold relatively stable.
The year-to-date, CPO prices have eased from their elevated position in the fourth quarter of last year, with premiums over soybean oil having disappeared.
Overall, a supply deficit remains likely this year with inventory levels expected to drop year-on-year hence, prices are likely to stay firm between RM4,000 to RM4,500 per tonne.
Kenanga Research, which maintained an 'overweight' rating on the sector, said: 'Amid current trade tension, tariff uncertainty and economic slowdowns, we like plantations for their defensive earnings.'
Its top sector picks are skewed towards larger integrated planters such as IOI with a target price of RM4.30 for its stronger upstream performance, turnaround in downstream margins and net-zero ventures in the longer term.
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