The plantation sector is expected to deliver stronger earnings in the coming quarters as crude palm oil (CPO) prices recover, despite a softer start to 2026 and ongoing challenges in downstream operations, according to Kenanga Research.
The research house maintained its OVERWEIGHT call on the plantation sector, citing supportive palm oil price dynamics, attractive valuations and potential upside from a developing El Niño weather pattern that could tighten global vegetable oil supplies.
The sector’s first-quarter performance was generally in line with Kenanga’s expectations but fell short of broader market consensus, as earnings were weighed down by seasonally weaker harvesting activity and lower palm product prices.
Analysts noted that weaker prices stemmed largely from a larger-than-expected inventory overhang, which pressured profitability across the industry during the quarter.
However, earnings are expected to improve moving forward as stronger CPO prices begin to filter through to planters’ results.
While upstream operations are likely to benefit from firmer commodity prices, Kenanga cautioned that downstream margins remain under pressure amid challenging market conditions.
The research house also noted that non-plantation income for diversified groups will continue to depend heavily on land disposals, as earnings contributions from property development businesses are expected to take longer to gain momentum.
El Niño Could Provide Additional Upside
Kenanga said market attention is increasingly turning to the possibility of El Niño conditions emerging in the second half of 2026.
While the severity of the weather event remains uncertain, any significant disruption to crop yields could provide further support for palm oil prices by tightening supply.
For now, the firm is maintaining its average CPO price forecasts of RM4,250 per tonne for 2026 and RM4,200 per tonne for 2027.
The brokerage believes current sector valuations do not fully reflect the potential upside from a severe El Niño event, while concerns over Indonesian regulatory and operating risks have already been partially priced into many plantation stocks.
IOI Corp Named New Top Sector Pick
Kenanga has identified IOI Corporation Berhad as its new top sector pick, citing its strong earnings outlook, limited exposure to Indonesian risks and industry-leading return on equity.
The firm expects IOI Corp to deliver a particularly strong fourth quarter for its financial year 2026, with only about 12% of its earnings derived from Indonesia, reducing its exposure to regulatory uncertainties in the country.
The stock carries an “Outperform” rating with a target price of RM4.55.
Kenanga also remains positive on Kuala Lumpur Kepong Berhad, which it said offers greater sensitivity to rising CPO prices as downstream earnings contributions remain relatively modest. The stock is rated “Outperform” with a target price of RM24.50.
Among smaller-cap names, the brokerage favours TSH Resources Berhad, highlighting its upstream earnings leverage to palm oil prices, long-term organic growth prospects and valuation discounts that already reflect concerns over its Indonesian operations.
Kenanga assigned TSH an “Outperform” recommendation with a target price of RM1.55.
Overall, the research house expects the plantation sector to remain supported by resilient palm oil prices and favourable valuation levels, while any escalation of El Niño conditions could serve as an additional catalyst for earnings and share price performance.
