• Maintain NEUTRAL, with new SGD3.30 TP from SGD3.50, 7% upside. The plantation industry is at the crossroads – with rising costs, falling yields, little chance for landbank expansion, where can growth come from? Planters are having to do a lot more to boost their bottomlines, so is diversification the key? Wilmar International is already very diversified but this can also prove to be an earnings drag, when one or more units are not performing. Valuation will likely remain suppressed, until earnings turn around significantly.

• Face the hard facts, and adapt. With headwinds like lower yields, older trees, environmental pressures, higher costs, labour issues and lower profitability, the sector has to find ways to circumvent these. CPO prices have risen to highs unseen in the last 10 years, but there is always a risk that extenuating circumstances can push prices down to below breakeven cost levels. We expect long-term CPO prices per tonne to be at the higher end of MYR3,000- 3,500 and above (historical average: MYR1,800-2,000), but prices are likely to stay volatile. As this is not within the planters’ control, they need to focus more on revenue growth, cost control and potential diversification efforts.

• Diversification may be the name of the game, going forward. Some planters have already diversified into other industries like property, fruit farming, glove manufacturing and dairy farming. In recent times, we have seen more ESG-friendly diversification like producing wood and fertiliser, etc and using palm oil waste. However, other than ventures that take advantage of their landbank like land sales and property development, none of these have moved the needle in terms of earnings contributions. With landbank monetisation like data centres or renewable energy ventures like solar farms now being a feasible diversification, this may change going forward, if more planters opt to engage. We estimate profitability/ha/year for solar is 26x more than oil palm.

• Other than diversifying earnings, planters will need to increase mechanisation to raise efficiency and reduce their reliance on labour, spend more on R&D to produce better seedlings with higher yields and lower maintenance costs, and put more emphasis on ESG to attain ESG premiums.

• For Wilmar, we maintain its ESG score at 3.3 – although we have seen improvements in its energy intensity and traceability, we note increases in its GHG emissions and water intensity. We note the plantation sector overall is moving in the right direction in terms of ESG standards, with the sector ESG score improving in 2024 to 2.6 (from 2.5).

• We reduce FY25F earnings by 11%, imputing our latest FX assumptions and reducing crushing margins, given the still-slow recovery in China. After rolling forward our valuation, our TP drops to SGD3.30 TP (including 4% ESG premium). Although valuation looks attractive vs its China-listed peers, we believe Wilmar will trade in line with regional valuations until earnings undergo a significant turnaround.

Source: RHB Research - 12 Aug 2024