Why is the Plantation Sector Lagging Behind the Market?

Despite the bullish Malaysian stock market this year, the plantation sector has been lagging behind. This underperformance can be attributed to fluctuations in palm oil prices and a lack of growth catalysts for earnings.

Key Factors Contributing to the Lag:

1. Earnings Volatility with Palm Oil Prices
Plantation company earnings peaked in 2022 but have been on a decline since. The Russia-Ukraine war disrupted the supply of sunflower oil from the Black Sea region, pushing global buyers to seek alternatives like palm oil. This led to a price surge, driving record earnings for many plantation companies during 2021-2022. However, in 2023, palm oil prices fell from over RM7000 to the current RM3500-4000 per ton. Despite this drop, prices are still 40-50% higher than the historical average of RM2700 before 2021, which helps offset rising production costs. Future demand is influenced by global economic conditions, but supply constraints, aging oil palm trees, and slower-than-expected replanting in Malaysia are likely to support palm oil prices. With lower fertilizer costs and improved productivity, plantation companies are expected to achieve stable earnings.

2. Environmental, Social, and Governance (ESG) Issues
Despite attractive measures by the Malaysian government, there is a lack of local interest in plantation work, leading to a reliance on foreign labor, which accounts for 85% of the workforce in the sector. This exposes companies to risks related to labor exploitation and rights maintenance.

3. Lack of Long-Term Value Drivers Leading to Low Valuations
According to the Malaysian Palm Oil Board (MPOB), Malaysia's plantation area has stagnated over the past five years. After reaching a peak of 5.9 million hectares in 2019, the area decreased to 5.65 million hectares in 2023. This is due to bans on developing primary forests and peatlands for oil palm cultivation and a cap on plantation areas at 6.5 million hectares. With limited land, companies are focusing on increasing productivity and operational efficiency. The fastest way to enhance profitability is through mergers and acquisitions, such as $KLK / 2445 (KUALA LUMPUR KEPONG BERHAD)'s RM1.53 billion acquisition of $IJMPLNT / 2216 (IJM PLANTATIONS BERHAD)’ 56.2% stake in 2021, which increased its plantation area by 28.7% to 274,688 hectares.

4. Low Trading Volume
The trading volume in the plantation sector remains low, especially when compared to sectors currently benefiting from the data center construction boom.

These factors collectively explain why the plantation sector in Malaysia has underperformed, despite the broader market's positive trends.