Hong Leong Investment Bank (HLIB) Research maintained its OVERWEIGHT call on the plantation sector, expecting elevated crude palm oil (CPO) prices to persist through the second half of 2026 amid tightening supply conditions and resilient demand.
The research house retained its average CPO price forecasts of RM4,450 per tonne for 2026 and RM4,300 per tonne for 2027, with IOI Corporation Bhd and Hap Seng Plantations Holdings Bhd (HSP) remaining its preferred sector picks.
HLIB has a BUY recommendation and target price of RM5.10 for IOI, while HSP carries a BUY call with a RM2.80 target price.
During the recently concluded second-quarter results season, five of the six plantation companies under HLIB’s coverage delivered results broadly in line with expectations. Johor Plantations Group Bhd (JPG) was the exception, with earnings falling short after fresh fruit bunch (FFB) production missed the research house’s estimates.
Aggregate core earnings among the planters increased marginally by 1% quarter-on-quarter to RM861 million in 2Q26.
HLIB said a seasonal recovery in FFB production and higher realised palm product prices lifted upstream earnings, although these gains were partly offset by weaker contributions from selected companies.
HSP’s core earnings declined mainly because of lower CPO and palm kernel sales volumes, while JPG was affected by a higher effective tax rate. Kuala Lumpur Kepong Bhd (KLK), meanwhile, was weighed down by its share of losses from associate Synthomer.
On a year-on-year basis, aggregate core earnings were broadly flat as stronger performances from HSP and IOI were largely offset by weaker earnings from JPG and KLK.
JPG’s performance was affected by lower FFB production and higher production costs, while KLK continued to feel the impact of losses from Synthomer.
El Niño Brings Drier Conditions
Production trends were mixed during the quarter, with three of the six planters under HLIB’s coverage — HSP, JPG and IOI — recording lower FFB output.
HLIB attributed the declines partly to shifts in cropping patterns, while JPG was particularly affected by aggressive replanting activities.
The research house also highlighted increasingly dry weather conditions since June due to the ongoing El Niño, with the dry spell appearing more pronounced in Indonesia than Malaysia.
While it remains too early to determine the eventual impact on plantation productivity, HLIB cautioned that prolonged dry conditions could affect yields with a lag.
This potential supply pressure forms part of the research house’s expectation that CPO prices will remain elevated during 2H26.
HLIB estimates that every RM100 per tonne increase in its average CPO price assumption could raise earnings among plantation companies under its coverage by between 3% and 8%, underscoring the sector’s sensitivity to palm oil prices.
Oleochemicals Support Downstream Recovery
HLIB also saw improving prospects for the downstream segment, which recovered both quarter-on-quarter and year-on-year during 2Q26.
The improvement was driven primarily by stronger demand for oleochemicals following supply-chain disruptions in the petrochemical industry arising from tensions in the Middle East.
Although competition from Indonesian producers continues to create a challenging operating environment, HLIB expects near-term oleochemical demand to remain supported by restocking activities amid geopolitical uncertainty and ahead of the implementation of the European Union Deforestation Regulation (EUDR).
With upstream earnings supported by relatively firm CPO prices and downstream conditions showing signs of improvement, HLIB maintained its positive stance on the plantation sector.
The research house said tightening supply conditions and resilient demand should sustain elevated CPO prices through the remainder of 2026, although weather developments and their eventual impact on FFB yields remain key factors to watch.
