Earnings pressure seen
PETALING JAYA: Malaysia's plantation sector could face fresh earnings pressure in the second half of this financial year, as a new layer of taxation takes effect from July 1 under the expanded sales and service tax (SST) regime.
According to RHB Research, the revised tax structure, which would impose a 5% levy on several upstream and downstream products, would add to the cost burdens of planters.
It noted that the tax would apply to fresh fruit bunches (FFB), empty fruit bunches (EFB), palm kernel shells (PKS), palm fatty acid distillate (PFAD), palm kernel fatty acid distillate (PKFAD), and palm kernel oil (PKO).
RHB Research said it expected the biggest negative impact to come from the purchase of external FFB for crude palm oil millers, as well as external PKO purchases for downstream planters.
'This tax is to be levied on top of all the other taxes the palm oil industry currently already faces – including windfall taxes, sales tax of CPO in East Malaysia, and export tax on all palm oil products,' the brokerage said, noting the negative impact of the expanded SST.
'While there can be some offsetting factor in the form of additional tax to be levied on sales of EFB, PKS and PFAD, among others, we believe the net earnings impact will still be negative,' it added.
Based on RHB Research's calculations, the earnings drag could range between 0.3% and 11% annually for the companies it covers, depending on the volume of externally sourced FFB.
'We base this calculation on external FFB purchased in Malaysia multiplied by the current FFB price of RM850 per tonne and multiplied further by 5%,' it explained.
The research house flagged FGV Holdings Bhd as the most exposed, noting that approximately 70% of its FFB intake comes from outside sources.
RHB Research added that limited disclosures on other inputs such as PKO purchases and sales of by-products made it difficult to quantify the full extent of the impact.
'However, we are unable to calculate the impact of the purchase of external PKO and sales of other products, as these disclosures are not given,' it explained.
While it continues to engage companies for greater clarity, RHB Research said it was maintaining its earnings forecasts for now.
'Earnings forecasts are unchanged for now till we obtain more clarification.'
RHB Research placed the sector's rating 'under review', although it remained cautiously optimistic on CPO prices.
'We acknowledge that geopolitical risks have led to a CPO price destruction over the last couple of months,' it said.
RHB Research's CPO price assumption of RM4,300 per tonne for the year is unlikely to be achieved based on the current trajectory.
This is because year-to-date, the CPO price averaged at RM4,400 per tonne.
However, it expected CPO prices to post a recovery towards the year end as seasonal production comes off its peak.
It added that planters continue to deliver earnings-wise, while valuations remain depressed at this juncture.
Its top picks remained unchanged, comprising Jaya Tiasa Holdings Bhd , Sarawak Oil Palms Bhd and Sime Darby Plantation Bhd.
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