PETALING JAYA: The imposition of the higher windfall profit levy (WPL) price threshold under Budget 2025 measures will be positive for plantation companies.
However, this will be offset by higher costs from revisions in the minimum wage, export duty structure, foreign worker levies and mandatory Employees Provident Fund (EPF) contributions for foreign workers.
CIMB Securities Research in a report said overall, the latest budget measures are negative for upstream planters in the short term.
“Our rough estimate suggests that the net negative impact on earnings of plantation companies under our coverage to be 1.5% to 4.1%.
“The research house noted planters most sensitive to these potential policy changes will be pure upstream operators in Malaysia with a lower earnings base.
“In the medium to long term, we believe these measures will 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.
“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,” explained CIMB Research.
In addition, the research house said it will adjust its earnings forecast pending clarification on the budget measures and company responses.
CIMB Research has maintained an “overweight” rating on the sector with SD Guthrie Bhd, IOI Corp Bhd
, Hap Seng Plantations Holdings Bhd and Ta Ann Holdings Bhd as its top picks, given their attractive asset valuations.
On the WPL threshold price, which is raised by RM150 per tonne to RM3,150 per tonne for Peninsular Malaysia and RM3,650 per tonne for Sabah and Sarawak, CIMB Research noted this change will take effect on Jan 1, 2025 with the WPL rate remaining at 3% for 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,” the research house noted.
This expectation was based on the industry proposal to reflect higher CPO production costs of RM2,800 to RM3,000 per tonne, it said.
“We estimate that this measure will be positive for planters, with a potential earnings per share upside of 0.7% to 2%.”
Meanwhile, the new export duty structure that introduces additional tiers and raises duty rates by up to two percentage points to 10%, particularly for CPO prices above RM3,450 per tonne, came as a surprise for planters.
This 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, the research house pointed out.
“We view this policy as neutral for integrated players such as IOI, SD Guthrie, Kuala Lumpur Kepong Bhd and Genting Plantations Bhd.
“It will be positive for downstream players, namely, Wilmar International Ltd and the Mewah Group.
“And negative for upstream players like Hap Seng Plantations and Ta Ann due to the higher export duty burden,” it said.
Another unexpected budget measure is raising the minimum wage by RM200 per month to RM1,700 per month, effective Feb 1, 2025.
“But, we believe the RM200 per month increase is manageable and is lower than some of the proposals reported in the media, which ranged from RM2,000 per month and above.
“This increase 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,” CIMB Research noted.
“Based on our rough estimate, assuming around 70% of workers will be affected by the wage hike, we estimate the potential impact on earnings to plantation companies to be between 1.7% and 4.5%.”
As for the multi-tier foreign workers levy, CIMB Research viewed this as a negative development, but it is unlikely to materially impact earnings.
“We do not anticipate a significant increase in the foreign workers’ levy for the plantation sector,” the research house added.
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% to 0.3%,” it noted.
The budget measure on the mandatory EPF contributions for foreign workers is also negative for plantation companies, as they may not have accounted for the employer share of EPF contributions for foreign workers.
According to CIMB Research, it remains unclear when this proposal will become mandatory.
“Our initial assessment is that the 2% 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% to 13% contribution required for Malaysian employees,” it said.
