The outlook for the plantation sector remains positive as crude palm oil (CPO) prices are expected to benefit from Indonesia’s B50 biodiesel mandate, sustained energy prices, and demand from India, according to TA Research. However, the research firm also highlighted potential near-term limitations due to stronger seasonal production and competitive pricing from soybean oil.

Seasonal improvements in fresh fruit bunch (FFB) production are anticipated in the second half of the 2026 financial year, though gains may vary among plantation companies. Looking ahead to 2027, the research noted growing concerns over El Niño-related supply risks in Indonesia, pointing to possible yield impacts lagging behind dry weather conditions. Rising fertilizer costs could add pressure on production expenses, while downstream margins are expected to remain mixed because of excess refining capacity and robust competition from Indonesian producers.

Uncertainty surrounding Indonesia’s new commodity exchange and export oversight framework was flagged as a possible source of volatility in palm oil trade flows, pending further regulatory clarity. Despite these challenges, TA Research projects CPO prices to stay firm into 2027, supported by stronger biodiesel demand and potential weather-related supply disruptions, which would partly offset improvements in near-term production.

The plantation sector’s performance in the second quarter of the 2026 financial year was broadly in line with expectations, with all companies under TA Research’s coverage meeting forecasts except United Malacca Bhd. Although CPO prices were generally softer year-on-year, sector earnings improved, buoyed by better production volumes, stronger downstream contributions, and operational efficiencies in select firms.

IOI Corp Bhd recorded gains from both upstream and downstream operations, while Kuala Lumpur Kepong Bhd (KLK) saw resilient plantation earnings alongside a marked manufacturing recovery. SD Guthrie also posted a stronger quarter thanks to improved downstream margins, higher CPO production, and firmer palm product prices, despite first-half upstream earnings being impacted by softer prices and FFB output. Kim Loong Resources Bhd's weaker plantation segment was offset by stronger milling earnings driven by increased CPO sales volumes, better processing efficiency, and improved margins.

Performance among smaller planters was uneven. TSH Resources Bhd staged a strong sequential recovery aided by lower operating costs and higher extraction rates, though year-on-year earnings were dampened by weaker CPO prices and reduced sales volumes. United Malacca was the sole company to miss expectations, hampered by lower FFB output, declining palm oil prices, and rising production costs.

Overall, the plantation sector’s core earnings grew 3.5 percent year-on-year in the first half of 2026, reflecting a shift toward earnings growth driven more by production recovery and operational improvements than by CPO price increases alone.

TA Research reaffirmed its overweight stance on the sector, based on a forecasted average CPO price of RM4,300 per tonne for 2026. The firm maintained "buy" ratings with target prices on KLK (RM24.64), IOI (RM5.36), United Malacca (RM7.03), and Kim Loong (RM2.82). It also upgraded TSH Resources to a "buy" from "hold" following share price weakness and improved risk-reward dynamics, while downgrading SD Guthrie to a "hold" from "buy," citing valuation concerns after a 23 percent share price rise since March.

Separately, an analyst from a local research house identified IOI and KLK as top picks. The analyst cited IOI’s improved earnings visibility for financial year 2027, supported by mid-single-digit FFB growth, rising oil extraction rates, and firm CPO prices. KLK’s broader earnings recovery was attributed to enhanced estate productivity, ongoing manufacturing resurgence, increased contributions from its associates, and less overhang from its UK-listed affiliate Synthomer plc.