KUALA LUMPUR: THE measures outlined in the 2025 Budget, including increases in minimum wages, higher foreign worker levies, and mandatory EPF contributions, are expected to raise production costs for palm oil producers in the short term.
CIMB Securities highlighted that while these measures pose challenges for upstream planters, the higher windfall profit levy (WPL) price threshold is positive for plantation companies in Malaysia.
"However, this impact (on upstream planters) will be partially offset by the increased price threshold for the WPL. Our rough estimate suggests that the net negative earnings impact on companies under our coverage could range from 1.5 per cent to 4.1 per cent," it said in a note.
The firm added planters most sensitive to these potential policy changes will be pure upstream operators in Malaysia with lower earnings bases.
In the medium to long term, these measures are expected to benefit progressive plantation companies that can achieve superior crude palm oil (CPO) yields compared to their peers and competing crops, helping to offset rising costs.
"Additionally, agricultural machinery suppliers or farm equipment manufacturers may benefit, as higher labour costs and tax incentives for automation could drive planters to accelerate mechanisation efforts and reduce dependency on foreign
labour," it said.
The government has proposed to increase the threshold CPO price for the imposition of the WPL by RM150 per tonnes to RM3,150 per tonne for Peninsular Malaysia and RM3,650 per tonne for Sabah and Sarawak.
This change will take effect on Jan 1, 2025, with the WPL rate remaining at 3.0 per cent on fresh fruit bunches.
"While this is a positive development, it falls short of our expectation for the threshold price to be raised to RM4,000 per tonne for Peninsular Malaysia and RM4,500 per tonne for Sabah and Sarawak," it said.
Meanwhile, the export duty structure for CPO came as a surprise and will impact upstream planters who export CPO, as they will face higher export duties, reducing their export competitiveness against Indonesia due to the narrowing differential in CPO export taxes.
However, CIMB Securities said this change will benefit downstream players, such as Malaysian refiners and oleochemical producers, by improving their competitiveness against Indonesia's downstream producers, given the higher export tax differential between processed palm oil (PPO) and CPO in Malaysia after the revision.
"Additionally, CPO exports from Sabah and Sarawak will continue to enjoy the reduced export duty, as they will still pay only 70 per cent of the gazetted rate."
It added that the increase in minimum wage will likely raise labour costs for upstream planters, as they will need to adjust the wages of some general workers who currently earn the minimum wage.
However, harvesters will not be affected, as they are already paid above the minimum wage.
The multi-tier foreign workers levy is viewed as a negative development by CIMB Securities, but it is unlikely to materially impact earnings, as the firm does not anticipate a significant increase in the foreign workers' levy for the plantation.
sector.
"Currently, the foreign workers' levy for the plantation sector is RM640 per annum. Based on our initial estimates, every RM100 per annum increase in the foreign workers' levy would reduce our net profit estimates for companies under our coverage by 0.1 per cent to 0.3 per cent," it added.
The mandatory EPF contributions for foreign workers is negative for plantation companies, as they may not have accounted for the employer share of EPF contributions for foreign workers.
"It remains unclear when this proposal will become mandatory. Our initial assessment is that the 2.0 per cent EPF contribution rate in the early years will not be too burdensome, but the cost will progressively rise over the next six years to match the 12–13 per cent contribution required for Malaysian employees.
"This will increase production costs unless worker productivity improves. We estimate the potential impact of a 2.0 per cent EPF contribution for foreign workers to negatively affect earnings per share by 0.4 per cent to 1.3 per cent," it added.