The plantation sector has reported better results for the second quarter of 2024 (2QCY24), following a disappointing first quarter. Improved upstream performance and unexpectedly positive downstream results contributed to this recovery.

However, MIDF Research (MIDF) in a note today (Sept 4) said despite the overall improvement in business earnings, the sector's performance slightly fell short of consensus expectations, with five out of nine companies reporting results below estimates.

According to industry analysis, the upstream segment benefited from higher margins, with pre-tax margins increasing by about 300 basis points to 22%, close to the long-term average. This improvement was driven by favorable palm product prices, reduced costs, and better harvests. The Malaysian Palm Oil Board (MPOB) reported an average crude palm oil (CPO) price of RM4,038 per metric ton for 2QCY24, a slight increase of 1% quarter-on-quarter and a 5% rise year-on-year.

Despite the positive developments in upstream operations, some companies faced challenges. KLK reported poor downstream performance, while GENP experienced lower harvests and higher costs. PPB's results were impacted by high relocation costs of cinemas and increased marketing expenses in the consumer food segment. Additionally, TAANN saw earnings dragged down by losses in its timber division.

The downstream segment saw an improvement in margins by about 150 basis points compared to the first quarter, with IOI and SDG reporting much stronger earnings driven by better demand and margins, particularly in European exports. The introduction of the European Union Deforestation Regulation later this year is expected to further influence downstream operations.

In response to regulatory constraints in upstream expansion, Malaysian planters are exploring alternative ventures to enhance returns. Recent initiatives include SDG's proposal for the Kerian Integrated Green Industrial Park, which includes a solar farm and industrial park, and KLK's acquisition of full control over development land in Johor. IOI has also expressed interest in solar farming potential within its estates.

While plantation earnings are expected to remain a core component of the sector for the next 3-5 years, the potential for property development is noted. However, it may take time for these projects to generate significant returns. The ongoing development of large-scale solar initiatives is anticipated to enhance profitability on less productive agricultural land, but it is not expected to replace plantation earnings as a core contributor.

Overall, the plantation sector is advised to maintain a neutral stance, given the tightening global edible supply-demand scenario. The current conditions do not suggest immediate increases in CPO prices. Unless market conditions push prices towards the RM4,000 to RM4,500 per metric ton range, the sector's neutral rating will persist. Recommended companies for growth include IOI, PPB, TSH, and UMCCA, while HSPLANT is suggested for income yields.