MBSB Research has upgraded Sarawak Plantation Berhad to a “BUY” recommendation and raised its target price to RM3.90 from RM3.55, citing stronger earnings prospects driven by improving fresh fruit bunches (FFB) production and potential firming in crude palm oil (CPO) prices.

The revised valuation is based on SPB’s FY27 earnings per share (EPS) of 39.0 sen, pegged to a price-earnings ratio (PER) of 10 times following valuation rollover and earnings adjustments.

Earnings growth is expected to be supported by the maturation of approximately 1,500 hectares of planted area over FY26 to FY27, which should improve FFB output, estate yields and oil extraction rates (OER).

The research house noted that emerging El Niño conditions could tighten regional palm oil supply and support firmer CPO prices into the third quarter of 2026, benefiting SPB through stronger upstream margins.

SPB’s fully Malaysian-based operations also provide insulation from Indonesia’s evolving policy and regulatory risks, while the company’s historical correlation of about 0.89 with CPO prices offers additional leverage to any sustained palm oil price uptrend.

Production Growth Despite Weather Challenges

MBSB Research highlighted that SPB’s management has revised its FY26 FFB production target to approximately 410,000 tonnes from the previous estimate of 450,000 tonnes following drier weather conditions.

Despite the adjustment, the revised target still represents a 13.6% year-on-year increase compared with FY25 production of 360,993 tonnes.

Rainfall in SPB’s operating areas declined by around 40% year-on-year up to May 2026, temporarily slowing crop ripening. However, yield performance remained resilient, with estate yield reaching 3.80 tonnes per hectare in 1QFY26, outperforming the Sarawak industry average.

The research house added that SPB continues to benefit from a favourable age profile, with around 30% of its estate classified as immature, providing a foundation for future production growth.

Higher Internal Crop Contribution Improves Efficiency

FFB processed declined 13% year-on-year to 101,000 tonnes during the quarter, despite estate production increasing 7% year-on-year.

The weaker mill throughput was mainly due to lower external crop purchases following tighter procurement practices and replanting activities by two major suppliers.

Nevertheless, internal estates contributed 63% of total mill intake during the quarter, compared with 37% from third-party sources previously, reflecting stronger self-sufficiency and improved crop quality control.

Fertiliser Exposure Well Managed

MBSB Research said SPB is in a favourable position after securing more than 60% of its FY26 fertiliser requirements before prices surged due to conflict-related supply disruptions.

While the remaining fertiliser needs may be purchased at higher prices, management expects the impact to remain manageable at approximately RM10 to RM15 per tonne of FFB.

The research house added that this places SPB in a better position compared with peers that remain more exposed to spot fertiliser prices.

Although fertiliser and diesel costs remain elevated, near-term cost pressures are expected to be moderated by earlier procurement commitments and improving operational scale.

Earnings Forecast Raised

MBSB Research raised its FY26 and FY27 earnings estimates by 1.1% and 23.7% respectively, supported by the expansion of mature planted areas of around 900 to 1,000 hectares.

The research house expects FFB output to remain above 400,000 tonnes, with yields estimated at 18.5 to 19 tonnes per hectare over the forecast period.

“Over the medium term, stronger crop production driven by higher internal crop contribution and improving estate productivity should help cushion margin pressures,” MBSB Research said.

The upgrade reflects expectations that SPB will benefit from improving production, favourable CPO dynamics and its strong upstream plantation fundamentals.