MORE oil palm plantation companies in Malaysia are diversifying into the king of fruits over its higher margins, using it as a means to reduce dependency on palm oil, said UOB Kay Hian analysts in a market report published on Tuesday (Aug 23).

However, due to a higher initial investment and a longer payback period in durian cultivation, it will likely remain a secondary source of income. Palm oil will still remain the primary crops for plantation companies, although more of them could be looking into alternative cash crops to mitigate the earnings volatility due to the volatile palm oil prices, wrote the analysts in the report.

Besides durian, the brokerage thinks pineapple plantations are also on the cards for these companies looking to diversify.

“These alternate cash crops are mainly cultivated on marginal or hilly areas which are not the optimum site for oil palm to be replanted on,” said the analysts, who maintained “market weight” on the plantation sector in Malaysia as they expect crude palm oil (CPO) prices to stay sideways.

They, however, cautioned downside risks from a better-than-expected soya bean yield in the US despite drier weather, as well as a record high production in Brazil’s next soya bean planting.

Though the brokerage believes there are no near-term catalysts for plantation share price performance, analysts see potential in both IOI Corporation and Hap Seng Plantations — both of whom’s financial performances are expected to outperform peers’ and add support to their share price performance.

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They like IOI Corporation for its highest exposure to Malaysia, making it the least affected by the depressing Indonesia domestic CPO prices. Noting also that the company’s downstream operations have been able to deliver good sales and improving margins as compared to its other big-cap peers, the analysts maintained a “buy” call on the counter at a target price of RM5.15.

UOB Kay Hian also recommended Hap Seng Plantations with “buy” and a target price of RM2.80 on the back of its high dividend yield of 7.9 per cent, supported by its stronger-than-peers’ earnings. 

Some potential catalysts for the sector include a higher-than-expected US green diesel demand, as well as a stronger-than-expected commodity cycle, while sector risks could come from disappointing earnings in the upcoming quarter, particularly for companies with exposure in Indonesia.

They will be mainly dragged by low sales volume and the lower CPO pricing as compared with their peers, said UOB Kay Hian’s analysts.