KUALA LUMPUR (June 16): Sarawak Plantation Bhd (KL:SWKPLNT) stands to benefit from stronger upstream margins, prompting MBSB Research to upgrade the stock to 'buy'.

The house raised its target price for the plantation group to RM3.90, up from RM3.55 previously, based on a valuation rollover and earnings adjustments, pegged at 10 times earnings per share of 39 sen for the financial year ending Dec 31, 2027 (FY2027). 

The research firm said the planter's earnings growth should be driven by the maturation of approximately 1,500 hectares over FY2026-FY2027, supporting stronger fresh fruit bunch (FFB) output, improving estate yields and firmer oil extraction rates.

"Together with emerging El Niño conditions that could tighten regional palm oil supply and support firmer crude palm oil (CPO) prices into the third quarter of 2026, Sarawak Plantation stands to benefit from stronger upstream margins," it said in a note on Tuesday.

Importantly, MSBS said the group's 100% Malaysian exposure insulates the group from Indonesia's evolving policy and regulatory risks. 

Its strong historical correlation of approximately 0.89 to CPO prices offers additional leverage to any sustained uptrend in palm oil prices. 

MBSB has tweaked its FY2026/FY2027 earnings estimates 1.1% and 23.7% higher respectively, banking on the expansion of the matured age bracket of approximately 900 to 1,000 hectares that will keep FFB output above 400,000 tonnes with a modest FFB yield of 18.5 to 19 tonnes per hectare over the period.

While the management lowered its FY2026 FFB target to approximately 410,000 tonnes from 450,000 tonnes previously following the emergence of drier weather conditions, the revised guidance still represents a respectable 13.6% year-on-year growth against the FY2025 base year of 360,993 tonnes. 

Rainfall in its operating areas declined by about 40% year-on-year up to May 2026, temporarily slowing crop ripening. 

Nevertheless, yield performance remained resilient at 3.8 metric tons per hectare in the first quarter ended March 31, 2026 (1QFY2026), continuing to outperform the Sarawak industry average. 

More importantly, the group continues to benefit from a favourable age profile, with a sizeable immature estate base of approximately 30% that should underpin future production growth. 

FFB processed declined 13% year-on-year to 101,000 tonnes despite estate production increasing by 7% year-on-year. The softer mill throughput was largely attributed to lower external crop purchases following tighter procurement practices and replanting activities by two major suppliers. 

Encouragingly, internal estates contributed 63% of total mill intake during the quarter, versus 37% from third-party sources, reflecting stronger self-sufficiency and improving quality control over the crop base. 

Further, the group has secured more than 60% of its FY2026 fertiliser requirements at pre-Middle East conflict-related spike prices, providing meaningful protection against recent volatility in fertiliser markets. 

"While the remaining requirement may be sourced at higher prices, the management estimates the impact to be relatively manageable at approximately RM10-RM15 per tonne of FFB. This places the group in a more favourable position than peers that remain largely exposed to spot fertiliser prices," said MBSB.

 Although fertiliser and diesel prices remain elevated, the near-term cost impact is expected to be moderated by earlier procurement commitments and improving operational scale. 

The management's revised unit production cost guidance of RM2,500-RM2,600 per tonne largely reflects conservative assumptions of weather and input costs. 

Over the medium term, stronger crop production driven by higher internal crop contributions and improving estate productivity should help cushion margin pressures.