KUALA LUMPUR (Aug 12): RHB Investment Bank Bhd (RHB IB) recommends plantation industry players to diversify into other sectors to strengthen their businesses, rather than relying solely on consistently high crude palm oil (CPO) prices to sustain earnings.

In a note on Monday, RHB IB highlighted that some plantation companies have already ventured into industries such as property development, fruit farming, glove manufacturing and dairy farming.

"Recently, we've observed more environmentally sustainable diversification, including the production of wood, fertiliser and other products using palm oil waste," RHB IB stated.

However, the investment bank noted that aside from ventures leveraging their landbanks — such as land sales and property development — none of these efforts have significantly contributed to earnings.

It pointed out that with the monetisation of landbanks through initiatives like data centres or renewable energy projects, such as solar farms, diversification may become more impactful in future.

RHB IB estimated profitability per hectare per year from solar energy could be 26 times higher than from oil palm cultivation.

The bank said with challenges such as lower yields, ageing trees, environmental pressures, rising costs, labour shortages and reduced profitability, the plantation sector must explore alternative strategies.

"CPO prices have surged to levels not seen in the last decade, but there remains a risk that external factors could drive prices below breakeven levels.

"We expect long-term CPO prices to be at the upper end of RM3,000 to RM3,500 per tonne, but prices are likely to remain volatile," it said.

Given that price fluctuations are beyond the control of planters, RHB IB emphasised the importance of focusing on revenue growth, cost management and diversification.

Additionally, it noted that planters should enhance mechanisation to improve efficiency and reduce reliance on labour, increase investment in research and development to produce better-yielding seedlings with lower maintenance costs, and prioritise environmental, social, and governance (ESG) practices to secure ESG premiums.

RHB IB also observed that the sector is progressing in ESG terms, with the average score improving to 2.6 this year, up from 2.5 previously.

The bank maintained its "neutral" rating on the plantation sector.

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