PETALING JAYA: Plantation companies are preparing for stronger harvests in the second half of this year (2H25), encouraged by improving weather conditions and a seasonal rise in yields, even as downstream margins remain under pressure, analysts say.

Industry players are banking on higher fresh fruit bunches (FFB) output and easing costs to support profitability in the months ahead.

According to Hong Leong Investment Bank Research (HLIB Research), despite downward revisions for FFB output for certain groups this year, planters remain optimistic of stronger output in 2H25, underpinned by more conducive weather and the seasonally higher cropping trend.

Among players that had lowered their FFB forecasts are Hap Seng Plantations Holdings Bhd

and Genting Plantations Bhd

due to excessive rainfall that disrupted harvesting early this year.

HLIB Research added that costs are expected to decline later this year.

“CPO production cost is guided to ease further in 2H25, as the additional Employee Provident Fund contributions for foreign workers and the full impact of the minimum wage hike are expected to be offset by higher FFB output and relatively stable fertiliser prices versus 1H25,” the research house said.

While upstream prospects look positive, downstream activities remain a drag.

HLIB Research noted: “The subdued performance of the downstream segment is likely to persist into 2H25, weighed down by the levy differential between Malaysia and Indonesia, alongside overcapacity in Indonesia that continues to suppress refining margins, and elevated feedstock costs coupled with weak demand in the oleochemical sub segment.”

Year to date, crude palm oil (CPO) prices have averaged RM4,342 per tonne.

“We maintain our 2025 and 2026 CPO price assumptions at RM4,200 per tonne and RM4,050 per tonne, respectively, as the seasonally higher cropping trend is expected to cap prices in the near term,” said HLIB Research.

The research house reiterated its “neutral” stance on the sector, citing the lack of significant near-term CPO price re-rating catalysts.

For exposure, its top picks are Kuala Lumpur Kepong Bhd

(KLK), with a price target price of RM24.65, and SD Guthrie Bhd

at RM5.37.

Recent earnings reinforced the divergence between upstream and downstream operations.

HLIB Research highlighted that earnings of four out of seven planters under its coverage – Gen Plantations, Hap Seng, Jaya Tiasa Holdings Bhd

and IOI Corp Bhd

– met expectations, while KLK, SD Guthrie and TSH Resources came in above expectations.

Higher yields and firmer palm kernel prices buoyed upstream results across most players, though not all benefitted equally.

“Higher FFB output driven mainly by seasonally higher cropping pattern and more conducive weather condition in Sabah lifted most planters’ upstream earnings except for Hap Seng,” it said.

“During the quarter, Hap Seng’s earnings fell 23%, as higher FFB output was more than negated by lower CPO sales volume, lower realised palm product prices and higher CPO production costs arising from the minimum-wage hik),” it added.

The downstream side presented a mixed picture.

“Earnings at the downstream segment, on the other hand, were mixed, with KLK and SD Guthrie seeing improved contributions while Genting Plantations and IOI saw weaker contribution,” HLIB Research observed.

Three out of four integrated planters under its coverage reported weaker refining and oleochemical results due to thinner margins and soft demand.