BROADLY, upstream earnings for quarter two calendar year 2025 (2QCY25) rose despite weaker crude palm oil (CPO) prices thanks to a stronger fresh fruit bunch (FFB) harvest.
Downstream would have fared better quarter-on-quarter (QoQ) if not for a very poor performance from IOICORP which reported a rare loss for its downstream operations.
“In 2QCY25, upstream performed much better than Kenanga’s expectation. CPO price did soften as expected, by about 10% QoQ but still inched up 2% year-on-year (YoY),” said Kenanga.
Production, however, was particularly strong. Not only did Indonesian yields recover from a dry spell last year, MPOB reported strong 2QCY25 palm oil output of 5.15 mil MT.
Malaysia seldom sees palm oil production exceeding 5m MT in the Apr-Jun quarter with the past 10-year average being only 4.678 mil MT.
This meant lower unit cost for the quarter especially when compounded with still low fertiliser prices and resilient PK prices.
Therefore, despite easier QoQ prices for CPO, 2QCY25 upstream margin was flattish QoQ but much stronger against previous corresponding quarter’s margin of 22%.
Upstream profit before tax margin thus ended n the first half of calendar year 2025 (1HCY25) at 30%, up from 20% in 1HCY24.
Overall downstream revenue did nudge up but very thin margins in 1QCY25 tightened further QoQ to 0.6% in 2QCY25.
SDG and KLK downstream actually did better QoQ even if dull on YoY basis.
However, IOICORP had an unusually poor downstream quarter, suffering a rare loss from its oleochemical operations which dragged the entire downstream down for the quarter.
Oleochemical earnings should improve in 2HCY25 from year-end festivities demand and stable palm oil prices.
However, refining margins are expected to stay thin so overall dull downstream prospects are expected for another 3-6 months.
Non-plantation losses should continue to alleviate as SDG is pushing aggressively into industrial real estate while GENP’s property arm is expected to see better earnings in 2H CY25.
KLK is also likely to see higher real estate earnings despite not pushing as aggressively as SDG.
Likewise, IOICORP’s investment into palmwood and Nextgreen’s EFB-to-pulp projects are not likely to see meaningful contribution for another two to three years.
Meanwhile, strong upstream cashflow is helping to cut net gearing from 35% to 32% on a sector basis.
“2QCY25 borrowing expenses were flat QoQ but we expect this to eventually trend down in line with rising cash holding and declining debt levels,” said Kenanga.
CY25 edible oil supply tightness looks likely to persist into next year. Although CY26 supply is expected to be better than this year, the increase can only match trendline demand growth of 3-4%.
Consequently, CY26 inventory is likely to stay flat YoY. CPO prices are thus expected to soften moving into CY26 but still firm as supply remains tight.
Our CPO price assumptions are RM4,200 per MT for CY25 and RM4,000 in CY26. With limited downside risk and undemanding valuations but no strong upside catalyst, we believe NEUTRAL is still an appropriate weighting. —Sept 8, 2025
Main image: New Straits Times
