Higher Foreign Workers Levy Could Cut Plantation Earnings by 1-8%

KUALA LUMPUR: The higher levy imposed on foreign workers could possibly cut plantation companies’ 2016 earnings by between 1% and 8%, as historically planters have absorbed the levy costs.

 

CIMB Research views the Government’s move to raise the foreign workers’ levy rate for plantation sector to RM1,500 as negative but it is partially offset by views of stronger CPO prices.

Plam Oil

 

The Malaysian Government has raised the foreign workers’ levy rate for those working in the plantation sector from RM590 to RM1,500 per worker, a 154% hike, effective Feb 1, 2016.

 

This is part of the Government’s initiative to restructure the foreign workers’ system, which will result in a RM2.5bil gain to its coffers.

 

“The government’s decision to more than double the levy rate for foreign workers in the plantation sector, from RM590 to RM1,500 per worker, came as a negative surprise to us and the industry. This is because the palm oil industry in Malaysia is heavily dependent on foreign workers, which make up about 78% of the total workers in the industry” it said in a note on Tuesday. 

 

Historically, plantation companies have absorbed the costs of the foreign workers’ levy. But it is still early to tell if the plantation industry intends to absorb or pass on the additional costs to the workers. 

 

CIMB believes the Malaysian planters may absorb most of the costs initially, in view of shortages of estates workers in Malaysia. 

 

Assuming the additional costs are borne by the employers, the research house projects that the new levy rate could crimp its earnings forecasts for Malaysian planters under its coverage by 1% to 8% for 2016 (assuming a full-year impact). 

 

The potential earnings cut on FGV and Hap Seng Plantations are higher due to their lower earnings base and higher earnings exposure to palm oil. 

 

However, it maintains Neutral on the sector as the higher foreign workers levy news could douse some optimism on the sector from the expectation of stronger CPO prices. 

 

“Share prices of some big-cap plantation companies in Malaysia rose by up to 9% last Friday on optimism of a stronger ringgit and potential B10 implementation in Malaysia. Our top picks in the region are Genting Plantations, Astra Agro and First Resources,” it said.