KMLOONG: Analyst Downgrades Plantation Stock to Sell Amid Limited Upside, Despite In-Line Earnings
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM2.31 (-0.7%) |
| Last Traded | RM2.33 |
| Recommendation | SELL |
TA Securities has downgraded its recommendation for a major plantation company to “SELL,” maintaining a target price of RM2.31. This decision comes despite the company reporting financial results for the second quarter and first half of FY26 that largely met expectations, with analysts citing limited upside potential at current valuations.
Performance Review
For the second quarter of FY26 (2QFY26), the company recorded a 19.0% year-on-year (YoY) growth in core net profit to RM48.0 million, supported by a 7.5% increase in revenue. Cumulatively for the first half of FY26 (IHFY26), net profit rose marginally by 1.3% YoY to RM89.1 million, while revenue grew 6.7% YoY to RM847.9 million. These figures represented 57% and 55% of TA Securities’ and consensus’ full-year estimates, respectively, aligning with expectations.
The plantation segment demonstrated a strong performance in IHFY26, with profits up 26.6% YoY to RM85.7 million. This was primarily driven by a 10.6% increase in the average Fresh Fruit Bunch (FFB) selling price and a 4.6% growth in FFB production. Conversely, the palm oil milling operations experienced a weaker performance, with profits declining 15.1% YoY to RM56.4 million. This was attributed to lower processing margins, a reduced oil extraction rate, and contracted sales volume, despite an improvement in average Crude Palm Oil (CPO) selling prices. Overall profit margins in 2HFY26 were softer due to these weaker milling margins, reduced CPO sales volume despite higher output, and increased financing costs. The group also declared an unchanged interim single-tier dividend of 5 sen per share for the quarter.
Outlook and Challenges
Management anticipates a 5-10% increase in FFB production for FY26, supported by an improved age profile of young palms and ongoing replanting programmes. The company also plans to replant approximately 300-500 hectares in FY26 and expects the average CPO price to hover above RM4,000 per tonne for the year.
However, TA Securities maintains a cautious view on CPO prices. Global soybean prices are projected to remain under pressure from ample South American supply, which could offset support from strong biofuel demand. The firm also highlights potential volatility due to weather patterns and trade policy shifts, particularly China-U.S. tariffs, which could impact CPO competitiveness and demand in the global vegetable oil market.
Valuation and Recommendation
TA Securities has maintained its target price at RM2.31 per share, based on 15 times CY26 EPS. However, it has downgraded its recommendation from “HOLD” to “SELL.” The rationale for the downgrade stems from the belief that there is limited upside potential at current levels, with existing valuations already having priced in near-term positives. While the operational performance remains stable and dividend payouts are consistent, the firm believes there is minimal room for further re-rating given the current market price.
