04 May 2012
Plantation Sector Update: Minimum wage policy to have minimal impact on plantation sector as Malayan Agriculture Producers Associations had already increased plantation workers’ wages to RM850 since August 2011 - Public Investment Bank Research
Despite the strong rally in crude palm oil (CPO) prices seen recently, we believe there will be downside pressure in the coming months given the ample supply situation and expected recovery in production. Under our coverage, we prefer Genting Plantations and Sime Darby with respective target prices of RM10.68 and RM11.21.
KL Kepong and IOI Corp, due to stretched valuations and less attractive growth prospects, remain neutral.
The tight disparity between consumption and production level has led to price rallies in most vegetable oils, ranging from 8% to 11% year-to-date. The higher demand for vegetable oil and disruption of supplies have also led to a lower estimated stock/usage ratio, down to 8.2% from 8.6% last year.
Stock/usage of soybean oil is estimated to touch a record low of 6.4% as the dry weather has adversely affected new South American crops. World soybean oil consumption growth of 3.9% will outweigh production growth of 2.1%.
Given the persistent supply concerns, soybean oil prices have risen to above US$1,350 a tonne, the highest level since August 2011.
World palm oil stocks are expected to grow by 4.6% this year on the back of a 5.8% production growth while consumption growth is expected to be lower at 5.7% due to sluggish demand from China and Europe. Stock/usage ratio remains above 10.6%, since 2009.
Indonesia and Malaysia, the world’s two biggest producers, are projected to achieve 25 million tonnes and 19.3 million tonnes respectively, registering a rise of 6.4% and 2.1%.
Malaysian plantation groups are also facing heightened cost pressures this year, mainly from rising labour cost, which account for about 30% to 35% cost of production per tonne of CPO.
The recent introduction of an RM800 to RM900 minimum wage scale across all sectors is expected to have a minimal impact on the plantation sector.
In August last year, the Malayan Agriculture Producers Associations had already increased plantation workers’ wages to RM850, comprising a minimum of RM650 per month and additional remuneration of RM200 per month, the latter not being subject to the Employees Provident Fund and Social Security Organisation deductions.
We think that companies will likely streamline their respective structures according to the minimum wage rate policy, and fully absorbing any negative impacts of wage increase this year. Higher wages would help increase worker efficiency and productivity in the long term.