Kenanga Research has maintained its OVERWEIGHT stance on Malaysia’s plantation sector, expecting crude palm oil (CPO) prices to remain elevated through the rest of 2026 and into 2027 as stronger biodiesel demand and the prospect of a very strong El Niño raise risks to future palm oil supply.
The research house kept its CPO price forecasts unchanged at RM4,500 per tonne for 2026 and RM4,700 per tonne for 2027, saying tighter supply prospects could support upstream plantation earnings despite Malaysian palm oil inventories reaching a decade high in August.
Data from the Malaysian Palm Oil Board (MPOB) showed August production at 1.817 million tonnes, up 1% month-on-month but 2% lower year-on-year.
Cumulative production for the first eight months of 2026 stood at 12.633 million tonnes, broadly unchanged from 12.629 million tonnes a year earlier and about 4% above the 10-year average of 12.12 million tonnes.
Kenanga said production momentum has gradually weakened on a year-on-year basis since February after record output in 2025.
It expects full-year fresh fruit bunch production to decline by around 1% to 2% from last year’s 20.28 million tonnes, reflecting a weakening biological yield cycle and the potential early effects of dry weather.
Inventories Hit 10-Year High
Palm oil exports fell 7% month-on-month and 2% year-on-year to 1.295 million tonnes in August, remaining below historical levels.
As a result, closing inventories climbed 7% month-on-month and 28% year-on-year to 2.824 million tonnes, representing a 10-year high.
The stock level was about 6% above Kenanga’s forecast but within 2% of market consensus.
Despite the elevated inventory level and seasonal peak production period, CPO prices remained firm at around RM4,493 per tonne in August, up 0.1% from July and 9% from a year earlier.
Kenanga believes the resilience in prices reflects growing concerns over future supply rather than current stock levels.
El Niño Could Hit 2027 Supply
The research house highlighted the latest outlook from the US National Oceanic and Atmospheric Administration (NOAA), which it said points to a greater than 90% probability of a very strong El Niño developing from September and potentially lasting into the first quarter of 2027.
Kenanga said drier conditions between September and December could reduce future palm yields, particularly if meaningful rainfall relief only arrives with the Northeast Monsoon between November and March.
Prolonged dryness can affect oil palm fruit size around six months later and disrupt flowering patterns and yields for as long as two years, it said.
Kenanga noted that two very strong El Niño events over the past three decades were followed by declines in global palm oil supply of about 3% in 1998 and 5% in 2016.
Against this backdrop, it expects 2027 palm oil production could decline by between 3% and 5%, supporting firmer CPO prices.
The return of haze and Air Pollutant Index readings entering unhealthy levels in parts of Southeast Asia was also cited as evidence that drier weather conditions are already developing.
Upstream Planters Seen Benefiting
Kenanga expects upstream plantation margins to remain robust over the next three to six months, supported by firm CPO prices and seasonally stronger production.
Demand for edible oils could also remain supported by higher biodiesel consumption, while the Middle East conflict and disruptions to Black Sea shipping could constrain Ukrainian sunflower oil exports and strengthen demand for alternative vegetable oils.
The combination should support stronger upstream plantation earnings in the second half of 2026, Kenanga said.
Downstream operations, however, face a more challenging outlook.
Although downstream margins improved sharply to around 6% in 2Q26, Kenanga expects regional overcapacity and intense competition to remain a headwind for another two to three years.
Non-plantation businesses are also unlikely to become significant earnings contributors before 2028, aside from potential land disposal gains.
IOI Corp, KLK Among Top Picks
Kenanga said plantation-sector valuations have moved higher following the recent outperformance of the KL Plantation Index, but remain reasonable.
The sector is trading at around 15 to 16 times price-to-earnings and 1.3 times price-to-book value, compared with three-year averages of about 15 times and 1.2 times respectively.
The research house sees further earnings upside if supply tightens while downside remains relatively defensive given the essential food and fuel demand underpinning vegetable oils.
Among large-cap planters, Kenanga favours IOI Corporation Bhd, with an OUTPERFORM call and target price of RM5.40, citing its FY2027 prospects, strong returns on equity and potential new non-plantation earnings streams from FY2028.
It also likes Kuala Lumpur Kepong Bhd, with an OUTPERFORM rating and RM25.80 target price, for its liquidity, exposure to CPO prices and attractive valuation.
PPB Group Bhd, with an OUTPERFORM call and RM13.40 target price, was highlighted for its regional food and fast-moving consumer goods exposure, although near-term uncertainties surrounding Wilmar International’s Indonesian operations remain.
Among smaller planters, Hap Seng Plantations Holdings Bhd is Kenanga’s preferred pure upstream exposure, with an OUTPERFORM call and RM3.00 target price. Its roughly RM710 million net cash position could also provide scope for higher dividend payouts.
Kenanga also favours United Malacca Bhd, with a RM7.00 target price, and TSH Resources Bhd, with a RM1.85 target price, for their upstream CPO exposure, relatively defensive balance sheets and production growth prospects.
Overall, Kenanga said the increased risk of severe El Niño-related supply disruption, combined with firm edible oil and biodiesel demand, reinforces its positive plantation-sector view despite near-term concerns over record-high inventories.
