TSH: Plantation Sector Navigates Climate Headwinds and Evolving Trade Dynamics

The plantation sector faces a complex landscape in 2026, characterized by shifting climate risks, evolving policy dynamics, and changing global trade flows. Despite these challenges, TA Securities maintains a Neutral stance on the sector, forecasting an average Crude Palm Oil (CPO) price of RM4,000/tonne for the year.

Climate Risks and Production Outlook

A significant factor influencing the sector is the heightened risk of an El-Nino event forming in the latter half of 2026. Historically, strong El-Nino episodes have led to severe droughts, impacting agricultural output and causing 6-12 month lagged declines in CPO production. Conversely, weak La-Nina phases tend to support production growth due to adequate rainfall and improved soil moisture.

The firm’s base case scenario for 2026 anticipates a production recovery following the lagged impact of the 2023-24 El-Nino, supported by favorable post-El-Nino weather and weak La-Nina effects. This recovery is expected to lead to a period of CPO price normalisation, trading within the RM3,500-4,000/tonne range. However, a “bull case” scenario envisages a new El-Nino emerging mid-2026, which could significantly tighten supply and drive CPO prices sharply higher, potentially reaching RM5,500/tonne.

Geopolitical Tensions and Trade Shifts

Global trade dynamics, particularly between the US and Europe, are also reshaping the palm oil market. Europe’s strategic shift to reduce reliance on US energy and strengthen “energy sovereignty” is influencing its biofuel strategy. While EU Deforestation Regulation (EUDR) compliant producers retain market access, structural incentives increasingly favor waste-based feedstocks like Used Cooking Oil (UCO) over conventional vegetable oils in the biofuel mix.

These policy changes, coupled with rising geopolitical risks and logistical instability (such as increased marine war risk insurance premiums and vessel rerouting in areas like the Red Sea), are expected to reorient global palm oil trade flows. Malaysia and Indonesia are likely to gradually pivot towards Asian markets, which demonstrate stronger demand resilience and cost competitiveness, while maintaining exposure to the uncertain European and US markets.

Investment Sentiment and Stock Recommendations

Foreign participation in the sector has been selective and catalyst-driven. While CPO price normalization and moderating earnings momentum led to a downtrend in foreign ownership through 2024 and 2025, early 2026 has shown signs of selective re-accumulation in certain stocks, partly linked to land monetization initiatives and expectations of enhanced shareholder returns. Sustained recovery in CPO prices, stronger earnings delivery, and clearer capital return policies are crucial for broader re-engagement from foreign investors.

Within the sector, TA Securities maintains its BUY rating on KLK (TP: RM23.09), TSH (TP: RM1.43), and UMCCA (TP: RM6.72). It holds a HOLD rating on KIML (TP: RM2.47) and SELL ratings on IOI Corp (TP: RM3.97) and SDG (TP: RM5.63).