Kenanga Research has maintained its Overweight call on Malaysia’s plantation sector, citing resilient crude palm oil (CPO) prices, stronger biodiesel demand and the increasing risk of a severe El Niño that could tighten palm oil supply.
The research house said Malaysian palm oil production rose 9% quarter-on-quarter but fell 1% year-on-year to 1.793 million tonnes in July 2026, bringing cumulative production for the first seven months of the year to 10.816 million tonnes.
Year-to-date production was 0.4% higher than the corresponding period last year and about 5% above the 10-year average of 10.344 million tonnes.
However, Kenanga noted that the pace of production growth has been slowing. While 2025 was a record year for Malaysian palm oil output and production momentum continued into February 2026, monthly output has since declined on a year-on-year basis.
It expects full-year 2026 fresh fruit bunch production to decline by 1%-2% from the 20.28 million tonnes recorded in 2025, mainly due to weaker yields and the potential impact of a severe El Niño.
Malaysia’s palm oil exports increased 15% month-on-month and 6% year-on-year to 1.392 million tonnes in July, but continued to lag production.
As a result, closing palm oil inventories climbed to a fresh 10-year high of 2.628 million tonnes, up 3% quarter-on-quarter and 24% year-on-year.
Kenanga said the inventory figure was about 4% above its estimate but within 1% of consensus expectations.
Despite higher inventories and stronger exports, the average CPO price remained firm at RM4,493 per tonne in July, broadly unchanged from June but 9% higher year-on-year.
The research house maintained its CPO price assumptions at RM4,400 per tonne for 2026 and RM4,450 per tonne for 2027.
Kenanga said the outlook for palm oil prices remains supported by stronger biodiesel demand and the growing risk of a very strong El Niño.
It noted that the US National Oceanic and Atmospheric Administration (NOAA) has indicated that El Niño has begun, with an estimated 81% probability of a very strong El Niño. Malaysia’s Meteorological Department has also indicated that a severe El Niño could occur in the fourth quarter of 2026 and first quarter of 2027.
Prolonged dry conditions could reduce oil palm fruit size within six months and disrupt flowering patterns, potentially affecting yields for up to two years.
Historically, a very strong El Niño has been associated with a 3%-5% decline in palm oil production in the following year, suggesting potential supply constraints in 2027.
Kenanga said CPO prices tend to react more quickly to El Niño risks than actual production, with historical episodes indicating that CPO prices could rise by 10%-30% under moderate to very strong El Niño conditions.
Palm kernel (PK) prices could be even more responsive, potentially rising 20%-45%, as palm kernel oil has fewer competing feedstocks compared with CPO.
The research house therefore expects upstream plantation revenue and margins to strengthen from the second half of 2026 into the first half of 2027, although it will assess individual planters’ hedging positions and management guidance during the upcoming results season.
While Kenanga remains positive on upstream plantation earnings, it continues to exercise caution over downstream operations.
Higher CPO and palm kernel oil input costs, intense regional competition and uncertain demand are expected to keep downstream margins under pressure.
However, earnings from non-plantation businesses, particularly property, are expected to provide additional support.
Kenanga highlighted SD Guthrie’s expansion into industrial property, which it expects could generate between RM500 million and RM1 billion in annual profit during 2026-27.
It also pointed to Genting Plantations’ RM200 million sukuk issuance in July to fund its 2,300-acre Johor Tech Smart City project, as well as Kuala Lumpur Kepong’s launch of i-Park@Coalfields in Sungai Buloh, Selangor, with AME Elite Consortium Berhad.
Meanwhile, IOI Corporation’s ventures into coconut, palm wood and empty fruit bunch-to-pulp businesses are expected to contribute from 2028 onwards.
Despite the recent outperformance of the Kuala Lumpur Plantation Index, Kenanga said valuations remain undemanding at around 15-16 times price-to-earnings and 1.3 times price-to-book, broadly in line with their three-year averages.
The research house believes robust demand for edible oils, supported by food and fuel requirements, should remain intact despite supply disruption risks arising from geopolitical tensions and the potential severe El Niño.
It therefore sees an upward bias to plantation earnings and palm oil price assumptions and maintains its Overweight stance on the sector.
Kenanga’s preferred stocks are IOI Corporation with an Outperform rating and target price of RM4.65, Kuala Lumpur Kepong at RM25.20, United Malacca at RM7.00 and TSH Resources at RM1.60.
Kenanga favours IOI for its sector-leading return on equity and contributions from new ventures; KLK for its sensitivity to CPO prices and growing property exposure; United Malacca for its maturing estates and attractive valuation; and TSH Resources for its upstream CPO exposure and ongoing expansion of new planting.
It also highlighted PPB Group, rated Outperform with a RM13 target price, as appearing oversold and trading at decade-low valuations, although uncertainties remain surrounding its Indonesian operations.
