The outlook for Malaysia’s plantation sector has strengthened after the US National Oceanic and Atmospheric Administration (NOAA) raised the probability of a “very strong” El Niño developing in the fourth quarter of 2026 to more than 90%, according to Kenanga Investment Bank Research.
The latest assessment marks an increase from the 81% probability of a very strong El Niño that NOAA had estimated in its previous update for October to December 2026.
NOAA has also warned that the weather phenomenon could potentially be the strongest El Niño since the 1950s, raising concerns over weather-related disruptions to agricultural output and providing a potential catalyst for crude palm oil (CPO) prices.
Kenanga said it maintains an Overweight call on the plantation sector, with the increasingly severe El Niño outlook creating an upside bias to its CPO and palm kernel (PK) price assumptions, forecasts and target prices.
The research house has maintained its CPO price assumptions at RM4,400 per tonne for calendar year 2026 (CY26) and RM4,450 per tonne for CY27, pending the upcoming earnings season, which could provide greater clarity on individual planters’ hedging positions and management guidance.
Kenanga had earlier raised its CY26 CPO assumption by 4% from RM4,250 per tonne to RM4,400, while its CY27 assumption was increased by 6% from RM4,200 to RM4,450.
Severe El Niño Could Disrupt Palm Oil Output
Historically, palm oil production tends to be affected by severe El Niño conditions, although the impact depends heavily on the intensity and duration of the dry weather.
NOAA classifies El Niño into four categories based on sea surface temperature anomalies: weak at between 0.5°C and 0.9°C, moderate at 1.0°C to 1.4°C, strong at 1.5°C to 1.9°C, and very strong at 2°C or higher.
Kenanga noted that palm oil output is generally affected only when El Niño reaches the very strong category and dry conditions persist for at least six months.
The timing of the weather phenomenon is also important. As El Niño typically develops in the second half of the year, the impact on fresh fruit bunch (FFB) yields is generally felt in the following year.
This could potentially provide support for CPO prices if concerns over future supply begin to intensify.
CPO Prices Could React Before Output Falls
Kenanga said CPO and PK prices could respond positively even to moderate or strong El Niño conditions, unlike plantation output, which typically requires a more severe and prolonged weather event to experience a significant impact.
Historically, CPO price movements following El Niño events have varied considerably, with prices initially declining on a quarter-on-quarter basis before subsequently rising by 10% to 40% in later quarters.
For now, Kenanga believes a more conservative 5% to 10% increase in CPO and PK prices is reasonable, particularly as prices are already elevated following geopolitical tensions in the Middle East.
The research house said it had therefore already partially priced in a very strong El Niño scenario through its revised CPO assumptions, although further upward adjustments cannot be ruled out.
Plantation Valuations Remain Attractive
Despite the Kuala Lumpur Plantation Index outperforming the broader market in recent months, Kenanga believes sector valuations remain undemanding.
The sector is currently trading at around 15 to 16 times price-to-earnings (PER) and 1.2 times price-to-book value (PBV), broadly in line with its three-year averages of 15 times PER and 1.2 times PBV.
These valuations also remain within the sector’s longer-term trading ranges of 15 to 30 times PER and 1.0 to 1.5 times PBV, according to Kenanga.
The research house believes resilient food and fuel demand, combined with potential supply disruptions arising from the ongoing conflicts in Ukraine and the Middle East, could support the sector.
The prospect of a very strong El Niño adds another potential catalyst.
Kenanga therefore reiterated its Overweight recommendation on the plantation sector.
Top Picks
Kenanga’s preferred plantation stocks include IOI Corporation, Kuala Lumpur Kepong (KLK), United Malacca (UMCCA) and TSH Resources (TSH).
IOI remains a preferred pick with an Outperform call and target price of RM4.65, supported by its sector-leading return on equity, contributions from new ventures and expectations of a strong fourth-quarter FY2026 performance.
KLK, also rated Outperform with a target price of RM25.20, is favoured for its sensitivity to CPO prices and its stronger push into property development.
UMCCA, with an Outperform call and target price of RM7.00, offers exposure to maturing estates and attractive valuations, while TSH, also rated Outperform with a target price of RM1.60, is seen as benefiting from CPO price sensitivity and a 40% expansion in new planting.
Kenanga also highlighted PPB Group, which has an Outperform recommendation and target price of RM13.00, saying the stock appears oversold and is trading at decade-low valuation multiples.
The research house said PPB’s strong fast-moving consumer goods positions in China, India and Southeast Asia provide long-term support, although near-term uncertainties surrounding its Wilmar International operations in Indonesia remain a concern.
Overall, Kenanga believes the combination of potentially severe weather disruption, resilient underlying demand and relatively reasonable valuations leaves room for further upside in plantation stocks.
