PETALING JAYA: Plantation companies have to become more efficient to manage cost pressures and falling output besides considering diversification into renewable energy (RE) generation or house data centres to grow their earnings potential, analysts say.
RHB Research said the sector’s efforts to diversify with ventures into dairy or fruit farming as well as glove manufacturing and property development had a marginal impact on their earnings but ventures like solar power generation is 26 times more profitable than oil palm-based activities.
“Currently, we understand that every megawatt (MW) of solar capacity will cost RM2.5mil to build, and will require between one and 1.5ha of land.
“Based on our back-of-the-envelope calculations, one hectare of land could yield as much as RM134,768 in earnings before interest and tax (Ebit) for solar farms versus just RM5,100 for oil palm,” the research house stated in a report on the sector.
Even renting out the land can earn planters double the Ebit, RHB Research added, as rental rates can be as high as RM10,000 per hectare annually, which is still higher than Ebit per hectare per year for operating a palm oil estate.
SD Guthrie Bhd is doing just that and has leased out 24 sites within its estates to solar operators, housing a total 583MW, which would take up about 583ha to 874ha of land.
Another option for planters is to monetise their land through property developers, especially near urban locations in Selangor, Johor, Negri Sembilan and Pahang.
The research house noted that plantation companies like IOI Corp Bhd
, Kuala Lumpur Kepong Bhd, Genting Plantations Bhd, FGV Holdings Bhd and SD Guthrie have land that can be carved out for property development or sale for such a purpose.
That aside, planters are having to do a lot more to boost their bottom line and their profit per hectare.
Some of these initiatives include increasing mechanisation to raise efficiency and reduce reliance on labour, spending more on research and development (R&D) to produce better seedlings with higher yields and lower maintenance costs, putting more emphasis on environmental, social and governance factors to attain higher valuations, the research house added.
While the sector is enjoying higher crude palm oil (CPO) prices in the RM3,000 to RM3,500 a tonne range, cost pressures are building and impacting margins as planted acreage ages and offers lower yields at a time when there is minimal land for expansion.
The research house noted that about 50% of Malaysia’s planted area of 5.65 million hectares is 20 years old and above and by 2027, the number of trees above 20 years old could balloon to 40% which would be negative for yields and at the same time cost the companies a lot of money to replant.
RHB Research estimated replanting costs to maturity have risen to as much as RM20,000 to RM25,000 per hectare from RM15,000 to RM20,000 per hectare five years ago, which means that replanting 40% of Malaysia’s palm oil plantations could cost as much as RM45bil to RM50bil.
Companies in the sector also face cost pressures such as the minimum wage and higher levies for foreign labour.
The research house noted that over the last five years, unit costs of palm oil planters have risen by 47% on the back of higher labour costs as well as higher fertiliser prices.
“Profit per mature hectare for the plantation companies under our coverage has fallen by as much as 45% to 50% over the last six years from 2014 to 2020 levels (excluding the anomalous years of 2021 and 2022 where CPO prices rose to unsustainable levels due to the impact of the global pandemic),” RHB Research highlighted.
The research house said it may no longer be reasonable to expect CPO to trade at a discount to other edible oils in the medium term.
“Global reliance on CPO will remain high and supply is tightening in view of rising biofuel mandates and climate-change effects. As such, we believe CPO prices would need to stay at higher levels to meet rising costs and increasing demand.
“We expect long-term CPO prices to now be at RM3,000 to RM3,500 per tonne versus the 25-year historical average of RM1,800 to RM2,000 per tonne,” it said, adding that short-term price movements however are likely to remain volatile.
Due to the challenging outlook, RHB Research has maintained its “neutral” call on the sector.
It noted the bigger players should have a better chance of facing the current industry headwinds, given their sturdier balance sheets, stronger R&D capabilities and more land.
“In terms of earnings, however, moves to diversify earnings by venturing into RE, or by disposing of land or developing land may take some time to gain traction and make a significant impact on earnings,” it stated.
