RHB IB Advocates Diversification for Plantation Sector

Following a previous suggestion by Maybank IB for plantation companies to venture into solar power, RHB IB echoes this sentiment and further recommends broader diversification within the sector.

RHB IB advises plantation industry players to diversify beyond CPO to fortify their businesses. The bank notes that some companies have already explored property development, fruit farming, glove manufacturing, and dairy farming. Moreover, recent trends show a shift towards environmentally sustainable diversification, such as producing wood, fertiliser, and other products from palm oil waste.

However, RHB IB points out that except for land-related ventures like property development, these efforts haven't significantly impacted earnings. The bank highlights the potential for more impactful diversification through projects like data centres or renewable energy, such as solar farms. RHB IB estimates that solar energy could be 26x more profitable per hectare per year than oil palm cultivation.

Given the challenges of lower yields, ageing trees, environmental pressures, and rising costs, RHB IB stresses the need for alternative strategies. While CPO prices have surged, they remain volatile and could fall below breakeven levels. RHB IB expects long-term CPO prices to hover between RM3,000 to RM3,500 per tonne but urges companies to focus on revenue growth, cost management, and diversification. Additionally, RHB IB recommends enhancing mechanisation, investing in research for better-yielding seedlings, and prioritising ESG practices to secure premiums.

For poorly performing yet asset-rich companies like $SAB / 5134 (SOUTHERN ACIDS (M) BERHAD), this diversification could be a viable strategy, although management is currently focused on CAPEX for equipment upgrades.