This article first appeared in The Edge Malaysia Weekly on September 27, 2021 - October 3, 2021

WHILE Putrajaya’s lifting of its foreign labour freeze on the plantation sector marks a silver lining for players, there is still some way to go before the strained industry sees any meaningful impact.

Putrajaya’s special grant to bring in 32,000 foreign workers for the plantation sector, which will see the Ministry of Human Resources drawing up standard operating procedures (SOPs), including identifying a 2,000-person capacity Covid-19 isolation centre near Kuala Lumpur International Airport (KLIA), is the only exemption given to any sector with regard to foreign labour. Other industries, such as manufacturing, will have to wait their turn until at least Dec 31.

While the government’s green light for foreign labour would be a good thing to restore productivity and allow for better cost efficiency, plantation companies need at least one to two months to source for foreign workers and bring them in, says Ivy Ng Lee Fang, head of Malaysia Research and regional head of Agribusiness Research at CGS-CIMB Securities Sdn Bhd.

“Bear in mind that the recruitment process must follow environmental, social and governance criteria — some companies are facing issues in this area — followed by a quarantine period,” Ng tells The Edge.

In a Sept 20 note citing takeaways from an engagement session with Malaysian Palm Oil Association (MPOA) CEO Datuk Nageeb Wahab, Kenanga Research analyst Adrian Kok points out that the situation in plantations has deteriorated to a labour shortage of about 75,000 harvesters, from 40,000 previously, and brought about a loss of yield of 20% since the foreign labour intake freeze was implemented on March 18, 2020.

Kok says: “We estimate additional worker shortage of an average of 2,000 with each passing month. Efforts to recruit locals are ongoing, but the attrition rate is high, with about 60% leaving within a year.

Citing Nageeb in another report, UOB Kay Hian research analysts Leow Huey Chuen and Jacquelyn Yow point out that companies’ efforts to hire locals for the plantation sector have been largely unsuccessful in the industry maligned as 4D — dirty, difficult, dangerous and demeaning. Based on a survey conducted on five companies, a total of 2,433 Malaysians were recruited in 2020, but 58% of them have resigned, the analysts said.

Sime Darby Plantation Bhd’s employment benefits on its website earlier this month — bearing the phrase “A happy life with a happy community awaits you” — offers insights into plantation players’ stepped-up efforts to recruit locals.

In an emailed response, Sime Darby Plantation tells The Edge that its ongoing efforts to recruit local workers have been met with varying degrees of success, depending on the type of work involved and the location of the estates.

Its employment benefits for local hires include free housing, subsidised utility bills, free on-site crèche facilities, monthly telephone allowance, yearly children’s schooling assistance, settling-in allowance, festive tokens, retirement benefits, annual leave, medical facilities and continuous on-the-job training, which the company says are “improvements over and above what it already offers”.

Sime Darby Plantation says: “We have reviewed and improved existing benefits, which were already better than other industries, and will continue to do so from time to time. For instance, we have increased the employers’ contribution to the Employees Provident Fund to 15%, above the statutory requirement of 12%.

“Our family-friendly housing is also another important factor. Workers can stay in houses with their families. We don’t have dormitories. The houses are built to support safe and secure community living. These benefits will allow many of our unemployed locals and those who are looking for an employment reset to stabilise their lives and livelihoods, especially during these challenging times.”

The company adds that its intensified recruitment drive from May 2020 until August this year brought in more than 4,300 local workers across its upstream operations in Malaysia.

That said, Sime Darby Plantation suffered an attrition rate of 1,500 local workers, or 35% of this group, as they left during the same period for various reasons, leaving behind more than 2,800 individuals, or 65%.

“Partly as a result of the labour shortage, we have seen a decline in fresh fruit bunch (FFB) production from our Malaysian operations in the last two years. Total full-year FFB production in Malaysia for FY2020 saw a 3% decline from FY2019,” it says.

Shares in plantation groups on the FBM KLCI fell last Monday (Sept 20) as investors pulled back amid growing fears that a default by China Evergrande Group will cause a spillover effect on the wider market. Shares in Sime Darby Plantation fell as much as 35 sen to close at RM3.45, while Kuala Lumpur Kepong Bhd (KLK) fell 36 sen to RM19.88 and IOI Corp Bhd dipped a further two sen to RM3.75 after falling sharply from RM3.91 the week before.

CGS-CIMB’s Ng dismisses the notion that the market reaction had to do with the government’s extension of its ban on foreign labour until Dec 31, which the Ministry of Human Resources has since clarified is applicable to “industries with the exception of plantation”.

“The market reaction could have been due to plantation investors who went into those stocks with the expectation that commodity prices would stay high. They could have taken the risk-off approach, given the China situation, by selling off their investments,” she suggests.

“Export data is still quite good. [Market] prices have come off a bit, which could be due to investors taking profit because of uncertainties of how commodity prices could be affected.

“We see how the Malaysian market has been affected, which is likely to be due to general concerns. If fears of Evergrande’s defaulting subside, then liquidity could make a comeback; however, investors are also watching closely for announcements from the US Federal Reserve.”

Ng projects an average crude palm oil (CPO) price of RM3,700 a tonne, taking into account a weaker CPO price after averaging higher than RM4,000 a tonne from the start of the year until August. She says: “To hit our CPO forecast of RM3,700 a tonne, we expect prices to dip below that level. Our CPO prices are quite conservative. That CPO is still above the RM3,700 mark suggests that there is still upside. Until the worker issue is resolved, we may continue to see production in Malaysia coming below the optimal level, which should be supportive of prices between the RM3,500 and RM4,000 levels, barring unexpected economic situations that could bring about a liquidity crash.”

CGS-CIMB has ascribed “add” calls to KLK, Genting Plantations Bhd and Hap Seng Plantations Holdings Bhd, with target prices (TP) of RM22.49, RM9.31 and RM2.35 respectively.

Kenanga Research maintains its “neutral” stance on the sector, with KLK (TP: RM23.60) and Genting Plantations (RM8.40) as its stock picks. UOB Kay Hian recommends Hap Seng Plantations (TP: RM2) for its ability to enjoy a higher selling price from spot selling and to command a premium for its Roundtable on Sustainable Palm Oil-certified CPO and high dividend yield of 7.5%.  

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