KUALA LUMPUR: CGS International Research expects stronger earnings for plantation companies in the second half of 2024 (2H24), coinciding with recent crude palm oil (CPO) prices reaching RM4,200 to RM4,400 per tonne.
The firm noted that most plantation companies are currently trading below their five-year averages, indicating potential upside.
"We favour pure upstream players with large Malaysian exposure due to their strong leverage to CPO prices and solid production growth in 2024.
"Pure Malaysia upstream companies under our coverage include Hap Seng Plantations Holdings Bhd, Ta Ann Holdings Bhd, and Sarawak Plantations Bhd," it said in a note.
Furthermore, CGSI Research said other pure upstream firms like Johor Plantations Group Bhd, Sarawak Oil Palms Bhd, and TSH Resources Bhd are well-positioned to benefit from elevated CPO prices and falling fertiliser costs.
Among the larger caps, the firm is positive on SD Guthrie Bhd's strategy to monetise non-core assets, while upstream growth is also strong.
"While we remain 'Neutral' on the plantation sector overall, given that integrated companies such as Kuala Lumpur Kepong Bhd (KLK) and IOI Corp Bhd may face margin pressure in downstream operations.
"We encourage investors to focus on the strong earnings potential and expected higher dividend payouts from midsized upstream players.
"Downside risks are higher-than-expected vegetable oil supply in the market. Upside risks include any merger and acquisition (M&A) deals and further business expansion," it noted.
Meanwhile, CGSI Research also sees potential for increased dividend payouts by plantation companies going forward, given the strong cash balances of most companies and the significantly reduced gearing ratios.
It said the improved topline and reduced operational costs in the 2024 and 2025 forecast, coupled with manageable capital expenditure (capex), would create a favourable environment for healthy free cash flow (FCF) growth, further strengthening the argument for payouts to rise.
The recent rise in CPO prices is attributed to China's easing of economic policies and geopolitical tensions in the Middle East driving crude oil prices higher, which, in turn, led to increased demand for vegetable oils.
CPO prices have increased by 13 per cent from their recent low in August 24, and the average CPO price year-to-date is at RM4,023 per tonne.