SDG: Earnings Beat Expectations on Cost Efficiencies, Target Price Raised
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
The plantation sector delivered robust financial performance in the second quarter of 2025, with earnings significantly exceeding market expectations. This strong showing was largely attributed to effective cost management and operational efficiencies, particularly among Indonesian planters or those with substantial exposure to the region.
Performance Review
In 2Q25, the sector reported impressive year-on-year earnings growth. This outperformance stemmed primarily from higher external Fresh Fruit Bunch (FFB) purchases, improved downstream margins, and lower unit costs. Notably, Indonesian downstream operations benefited from a wider year-on-year tax differential and an increased take-up rate for biodiesel, driven by the B40 mandate, which helped expand margins despite a quarter-on-quarter softening due to narrower tax differentials.
Conversely, Malaysian downstream players faced headwinds, experiencing weaker quarter-on-quarter and year-on-year margins due to heightened competition from Indonesian rivals. Some companies, like Sarawak Oil Palms, also reported downside surprises due to lower external purchases and higher unit costs. Overall, refining margins are anticipated to remain soft, suggesting a need for gradual improvements in downstream segments.
Future Outlook
The outlook for the second half of 2025 remains optimistic, with robust earnings anticipated, supported by higher output volumes. Malaysian FFB output demonstrated a substantial 17.5% quarter-on-quarter and 5% year-on-year increase in 2Q25. Production is expected to continue its upward trajectory into the second half, likely peaking in September-October 2025. Similarly, Indonesian companies recorded strong output growth in 2Q25, with a healthy 8.5% year-on-year increase for the first half of 2025. While growth is projected to moderate in 2H25 from a high base in 4Q24, mid-to-high single-digit growth forecasts for 2025 remain intact.
Despite an expected moderation in Crude Palm Oil (CPO) prices as output reaches its peak, prices are likely to find support from upcoming festive demand. Malaysia’s palm oil inventory rose by 4% month-on-month to 2.2 million tonnes in August 2025, and stock levels are expected to remain above this 2 million-tonne threshold in the near term.
