Kenanga Research has maintained its OVERWEIGHT call on Malaysia’s plantation sector as stronger upstream and downstream earnings, tightening edible oil supplies and mounting El Niño risks support its expectations for elevated crude palm oil (CPO) prices into 2027.
The research house maintained its CPO price forecasts at RM4,500 per tonne for 2026 and RM4,700 per tonne for 2027, noting that prices have already strengthened amid weather concerns, increased biodiesel demand linked to the Middle East conflict and disruption to Ukrainian sunflower oil exports through the Black Sea.
CPO prices rose to RM4,612 per tonne in August, about 7% above the 1H26 average of RM4,329, with Kenanga expecting prices to remain elevated over the next three to six months.
The positive commodity backdrop comes as plantation companies delivered a more balanced 2Q26 reporting season, with upstream and downstream earnings improving both quarter-on-quarter and year-on-year.
Headline sector earnings were distorted by Kuala Lumpur Kepong’s (KLK) RM1.625 billion impairment on the carrying value of its 27%-owned UK-listed associate Synthomer, which operates in specialty chemicals including adhesives and coatings.
The impairment represented about 90% of the carrying cost of the investment and dragged down both non-plantation contributions and overall sector earnings.
After adjusting for the impairment and other one-off, non-recurring or non-operational items, Kenanga said 2Q26 plantation earnings improved and converged towards both its and consensus expectations.
Of the companies assessed against Kenanga’s forecasts, 44% met expectations, 22% exceeded estimates and 33% fell short. Against consensus expectations, results were distributed roughly equally between beats, misses and in-line performances.
This represented an improvement from 1Q26, when none of the results exceeded Kenanga’s estimates and only United Malacca (UMCCA) beat consensus forecasts.
Upstream plantation earnings increased 27% quarter-on-quarter and 3% year-on-year in 2Q26, supported by better fresh fruit bunch (FFB) production and resilient margins.
Harvest volumes increased 14% from the preceding quarter and 1% from a year earlier.
Adjusted upstream margins stood at around 29%, improving slightly from 28% in 1Q26, although marginally below the 30% recorded a year earlier.
Kenanga described margins as robust, remaining in the upper half of the sector’s five-year range of between 14% and 40%.
Seasonally higher FFB output helped maintain profitability, while CPO prices increased 4% quarter-on-quarter and 1% year-on-year. Kenanga said realised prices could potentially have been stronger without some forward sales contracted at lower prices.
Palm kernel prices also climbed 10% quarter-on-quarter and 4% year-on-year, helping offset estimated cost inflation of about 5%.
Looking ahead, Kenanga sees weather as an increasingly important upside catalyst for CPO prices.
With haze returning to Southeast Asia and El Niño expected to intensify towards year-end, the research house sees risks to palm oil production from forest fires, severe haze, operational downtime and weaker FFB yields in 2027.
Historically, Kenanga said a very strong El Niño can reduce palm oil production by between 2% and 9%, potentially driving CPO prices 5% to 10% higher.
Supply-side risks are being compounded by developments in other vegetable oils.
The Middle East conflict has increased demand for biodiesel, while Black Sea shipping disruptions threaten sunflower exports from Ukraine. Combined with an already-tight edible oil supply backdrop at the beginning of 2026, Kenanga expects these factors to keep CPO prices supported.
Downstream operations recorded an even sharper earnings improvement during the quarter.
Adjusted downstream profit surged 123% quarter-on-quarter and 264% year-on-year, making 2Q26 the most profitable quarter for downstream operations in three years.
Kenanga attributed the improvement primarily to higher margins, supported by firmer petrochemical prices, greater plant utilisation following restocking orders and favourable trading positions.
Some companies had secured inputs such as CPO at cheaper prices before processing and selling products into a higher-price environment.
However, Kenanga does not expect the exceptionally strong profitability to persist.
Regional overcapacity remains a structural headwind, and the research house expects downstream margins to moderate during 2H26 and 2027. Nevertheless, margins are forecast to remain positive at around 2% to 3%, compared with an average of about 6% in 2Q26.
Non-plantation operations were the major drag on reported sector earnings.
Despite SD Guthrie recording a RM443 million land disposal gain, the sector’s non-plantation operations registered losses of RM1.2 billion in 2Q26, compared with a RM160 million profit in the preceding quarter and a RM17 million loss a year earlier.
The deterioration was overwhelmingly attributable to KLK’s RM1.6 billion Synthomer impairment.
Kenanga expects further disposal gains from SD Guthrie during 2H26 to reduce the full-year non-plantation loss.
Over the longer term, it expects non-plantation businesses to become increasingly meaningful earnings contributors. SD Guthrie, KLK and Genting Plantations are expanding their real estate activities, while SD Guthrie and IOI Corp are exploring renewable-energy opportunities including solar farms.
IOI’s palm wood and empty fruit bunch-to-pulp joint ventures are also expected to begin contributing from 2027 or 2028.
Sector net gearing edged up to 34% from 33% a year earlier, although it was unchanged quarter-on-quarter.
Kenanga attributed the increase partly to the impact of KLK’s Synthomer impairment on reserves and an additional RM525 million of borrowings at SD Guthrie for higher working capital requirements.
Borrowings remain concentrated among large integrated planters including IOI Corp, KLK and SD Guthrie. Among non-integrated planters under Kenanga’s coverage, all were in net cash positions except Genting Plantations.
Kenanga believes current plantation-sector valuations of around 14 to 16 times price-to-earnings and 1.3 times price-to-book value are not demanding, particularly given the potential upside to CPO prices from El Niño.
The research house favours IOI Corp for its strong FY27 outlook, sector-leading returns on equity and potential contribution from new non-plantation businesses from FY28.
KLK offers greater earnings sensitivity to higher CPO prices due to its relatively limited downstream contribution, while Kenanga believes some of the risks surrounding its sizeable Indonesian exposure are already reflected in its valuation.
Among smaller planters, Kenanga favours Hap Seng Plantations for its exposure to further CPO price upside and defensive net cash position of RM710 million.
It also highlighted TSH Resources, with an OUTPERFORM call and RM1.85 target price, as an upstream-focused CPO play with long-term expansion underway.
PPB Group, rated OUTPERFORM with a RM13.40 target price, is seen as attractive for longer-term investors following its fall to decade-low valuations, although uncertainties surrounding Wilmar International’s Indonesian operations remain a near-term concern.
United Malacca, meanwhile, carries an OUTPERFORM recommendation and RM7.00 target price, supported by rising FFB production and improving returns as its Indonesian estates mature.
With supply risks building and CPO prices already strengthening, Kenanga maintained its OVERWEIGHT stance, viewing the plantation sector as positioned to benefit should an intensifying El Niño further tighten global vegetable oil supplies.
