• Maintain NEUTRAL and SGD1.45 TP, 5% upside with c.5% yield. The sector is at a crossroads. With rising costs, falling yields and little chance for landbank expansion, planters need to do a lot more to boost their bottomlines – so, is diversification the key? First Resources may be able to diversify via further downstream ventures, but more needs to be done to improve profit per ha. Our ESG score rises to 2.7 (from 2.5) post-annual review. Valuation is fair – trading at 9.2x 2025F P/E (vs peer range of 6-11x).

• 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.

• We believe the sector is moving in the right direction in terms of ESG standards, with more disclosure and more targets being set. Our overall average sector ESG score has improved this year to 2.6 (from 2.5).

• For FR, we have raised its ESG score to 2.7 (from 2.5) as we have seen improvements in its GHG intensity as well as progress made in certifications and traceability, which has led us to raise its “Environment” pillar scoring.

• Maintain NEUTRAL and TP of SGD1.45, after imputing our higher ESG score, updating FX assumptions and rolling forward our valuations to FY25 (from FY24). Our TP now includes an ESG discount of 8% (from 12%). We make no changes to our earnings forecasts.

Source: RHB Research - 12 Aug 2024