KUALA LUMPUR (Oct 8): CIMB Securities welcomes the idea of raising the windfall profit levy (WPL) threshold by the government, in the upcoming Budget 2025, as such a move could boost the earnings of Malaysian plantation companies by up to 5%.

“We would view it positively if the government raised the WPL threshold to around RM4,500 per tonne, up from the current RM3,000 to RM3,500 per tonne,” CIMB Securities said a report on Tuesday.  

Currently, a WPL rate of 3% is imposed on palm oil prices exceeding RM3,000 per tonne in Peninsular Malaysia and RM3,500 per tonne in Sabah and Sarawak. 

"This move [raising WPL rate] would improve the earnings leverage of Malaysian plantation companies during periods of rising crude palm oil (CPO) prices,” CIMB Securities added, noting that the threshold increase would particularly benefit pure upstream operators with lower earnings bases.

The house also said market expectations for the abolition or adjustment of the WPL are low, "as the sector has not re-rated ahead of Budget 2025 on Oct 18, 2024."

The research note also cited an interview with The Edge Malaysia, which quoted Minister of Plantation and Commodities Datuk Seri Johari Abdul Ghani as saying that a proposal had been submitted to the Ministry of Finance to either abolish or raise the WPL threshold. 

Johari cited rising production costs, which have climbed to RM2,800–3,000 per tonne, compared to RM1,800 per tonne previously, making the current levy redundant.

The government reportedly collected RM922 million in WPL for 2023 and RM1.023 billion in 2024, down from RM3.023 billion in 2022.

In addition to the WPL adjustments, Johari proposed a review of the cooking oil subsidy, which cost the government RM4 billion in 2022 and RM845.5 million in 2023. The government currently subsidises 720,000 tonnes of cooking oil annually, primarily through 1kg packs priced at RM2.50 per kg, targeted at low-income consumers and micro-traders.

Johari advocates for abolishing the subsidy in favour of direct cash transfers to the B40 (Bottom 40% income) group, citing inefficiencies and leakages in the current system, where wholesalers resell subsidised oil at inflated prices or divert it for biofuel use.

“Should the government rationalise the cooking oil subsidy, it could partly offset the lower windfall profit tax collection. Improved long-term profitability for plantation estates would, in turn, encourage replanting efforts, boosting fresh fruit bunches (FFB) yields and future tax revenue for the government,” CIMB Securities said.  

Johari also proposed consolidating independent smallholders into clusters of 8,000 to 10,000 hectares, with support from larger plantation players to manage these clusters. Additionally, he urged the government to allocate more funds for the Smallholder Oil Palm Replanting Financing Incentive Scheme in the upcoming budget.

CIMB Securities has maintained its 2024 forecast for average CPO prices at RM3,900 per tonne (8M24: RM4,005 per tonne), with expectations of a price decline during the peak production season in the fourth quarter of 2024.

For sector exposure, CIMB Securities favours SD Guthrie Bhd (KL:SDG), IOI Corp Bhd (KL:IOICRP), Ta Ann Holdings Bhd (KL:TAANN), and Hap Seng Plantations Holdings (KL:HSPLANT) for sector exposure.

Key catalysts for these stocks include better-than-expected CPO prices, potential value creation through mergers and acquisitions, and unlocking land bank value.