Amid a worsening El Niño weather pattern, challenges related to yield and sustainability are increasingly affecting the oil palm sector. Recent analyses indicate that prolonged drought and associated wildfires in Indonesia are exacerbating concerns over production and environmental practices.

Kenanga Research has downgraded plantation sector stocks to a “neutral” stance from “overweight,” advising investors to adopt a cautious approach despite the Kuala Lumpur Plantation Index outperforming the broader market in recent months. The firm highlighted that rising input costs, including fertilizer prices and higher minimum wages, are expected to suppress profitability over the next one to two years.

The haze that has persisted since August—attributable to drought conditions and fires in Indonesia’s Sumatra and Kalimantan regions—is projected to continue for another three to six months. Kenanga Research noted that the full impact on palm oil yields typically manifests about 10 months later, forecasting a 4% year-on-year decline in production for 2027.

Plantation stocks currently trade at a price-to-book value (PBV) of approximately 1.3 times, which is near the higher end of the historical range spanning 0.9 to 1.5 times over the past three to ten years. While valuations are not considered excessive, the PBV has increased from 1.2 times in the preceding quarter, aligning with the three-year average.

Among recommended stocks, IOI Corp Bhd receives an “outperform” rating for its robust management team and leading return on equity, with a target price of RM5.40. Kuala Lumpur Kepong Bhd shares also carry an “outperform” call, supported by their sensitivity to crude palm oil (CPO) price fluctuations and a target price of RM25.80. Other plantation companies flagged as top picks include PPB Group Bhd, Hap Seng Plantations Holdings Bhd, United Malacca Bhd, and TSH Resources Bhd, all rated “outperform” with respective target prices reflecting their growth prospects and operational strengths.

Meanwhile, MBSB Research maintains a positive tactical outlook on plantation stocks, setting an average CPO price target of RM4,400 per tonne. The firm retains a “buy” rating on SD Guthrie Bhd, with a target price of RM7.65.

Concerns over sustainability have intensified due to the recurrent haze, which presents risks to the broader image and practices of the sector. MBSB Research emphasized that prolonged dryness increases the vulnerability of plantation areas to fires, often driven by illegal burning, potentially undermining industry efforts toward sustainability. The firm stressed the importance of robust fire prevention and response capabilities at the estate level—particularly the management of water tables, monitoring of hotspots, firefighting readiness, and adherence to zero-burning policies during dry periods.

SD Guthrie, for example, employs advanced monitoring technologies including the use of over 50 drones to oversee areas within 5 kilometers of its Indonesian estate boundaries. Planted peat—a high-risk area for fire—accounts for a small portion of acreage for some companies, such as 2.29% for IOI Corp and 2.23% for Johor Plantations Group Bhd, but is significantly higher for firms like Ta Ann Holdings Bhd and Sarawak Plantation Bhd.

While certifications such as Malaysian Sustainable Palm Oil, Indonesian Sustainable Palm Oil, and the Roundtable on Sustainable Palm Oil offer frameworks for environmental safeguards, experts note that their ultimate effectiveness hinges on rigorous implementation in the field.