TH Plantations Berhad: Assessing the Sustainability and Scalability of Capital Efficiency Gains

TH Plantations Berhad (KLSE: THPLANT) has emerged as a case study in capital efficiency improvements within the Malaysian palm oil sector. Over the past five years, the company has achieved a 24% increase in its Return on Capital Employed (ROCE), rising to 7.7% as of June 2025, despite relatively flat capital employed, according to a Yahoo Finance report. While this metric remains below the Food industry average of 9.7%, the trajectory suggests a meaningful shift in operational discipline and resource allocation. This article evaluates whether these gains are sustainable and scalable, particularly in light of the company's ambitious AL-Falah 22/22 plan and evolving industry dynamics.

Capital Efficiency: Progress and Persistent Gaps

THP's ROCE improvement is underpinned by cost-cutting measures and operational restructuring. According to Yahoo Finance, the company's ROCE has risen steadily since 2020, driven by reduced gearing (from 1.57x in 2019 to 0.63x in 2023) and enhanced productivity. However, its ROIC of 4.6%, as reported by Alpha Spread-a metric that measures returns on invested capital-remains significantly lower than ROCE, indicating that reinvestment of capital has not yet translated into commensurate profitability. This discrepancy raises questions about the quality of capital allocation, particularly as the company seeks to scale its operations.

The company's free cash flow of MYR 110.67 million (trailing twelve months) suggests it has the liquidity to fund growth initiatives, but capital expenditures of MYR -58.93 million highlight a reliance on organic efficiency gains rather than aggressive reinvestment. This cautious approach may limit scalability in the long term, especially as the palm oil sector faces structural challenges such as global supply competition and regulatory pressures from the EU's Deforestation Regulation, according to an i3investor analysis.

Strategic Initiatives: AL-Falah 22/22 and Beyond

THP's five-year AL-Falah 22/22 plan aims to bridge these gaps by targeting a Fresh Fruit Bunch (FFB) yield of 22 MT/Ha and an Oil Extraction Rate (OER) of 22% by 2028. These goals are ambitious, given that 2023 yields stood at 15.18 MT/Ha, partly due to the rehabilitation of underperforming estates in Sarawak. The company's progress thus far-11.3% higher FFB yield per hectare in Q3 2024, as shown in the company's LinkedIn post-suggests that mechanization and Good Agronomic Practices (GAP) are beginning to bear fruit.

However, the sustainability of these gains hinges on external factors. For every RM100/MT change in Crude Palm Oil (CPO) prices, THP's profit fluctuates by approximately 5%. With global palm oil stockpiles at 2.20 million tonnes in August 2025 and exports facing headwinds, the company's ability to maintain margins amid volatile commodity prices remains a critical risk. Analysts note that while domestic demand in Malaysia has surged 43.9% year-to-date, oversupply and weak global demand could pressure prices further.

Diversification and Sustainability: New Frontiers

THP's foray into renewable energy and forestry projects, such as its 1.2MW biogas plant in Kluang, Johor, represents a strategic pivot to diversify revenue streams. This joint venture, expected to generate income starting in late 2025, aligns with the AL-Falah 22/22 roadmap and could mitigate reliance on palm oil price cycles. However, these initiatives are in early stages and may not contribute meaningfully to capital efficiency before 2027.

Environmental sustainability also plays a role in THP's long-term viability. The company's healthy tree age profile-most trees at mid-prime maturity (13 years old)-supports yield improvements, but replanting 5% of its matured area annually will require sustained investment. As noted in industry commentary, such efforts are essential to avoid yield declines as older trees reach the end of their productive lifespan.

Market Outlook and Investor Considerations

Despite these challenges, THP's Q1 2025 results offer a glimmer of optimism. Revenue rose 14% year-over-year to RM179.1 million, driven by higher CPO prices and improved operational margins. Operational profit before tax surged 37%, excluding non-core impacts, underscoring the company's ability to capitalize on favorable market conditions. Yet, a 5.5% share price decline in early September 2025 signals lingering investor caution.

For capital efficiency gains to be scalable, THP must demonstrate consistent execution of its AL-Falah 22/22 targets while navigating macroeconomic headwinds. The company's recent focus on mechanization-covering 62% of its total area-has already reduced labor costs by RM5–6 million annually. If these efficiencies compound alongside yield improvements, THP could close the gap to industry averages. However, the path to 22 MT/Ha and 22% OER remains uncertain, particularly if global demand for palm oil weakens or geopolitical tensions disrupt supply chains.

Conclusion: A Work in Progress

TH Plantations Berhad's capital efficiency improvements reflect a disciplined approach to cost optimization and operational restructuring. While ROCE gains are encouraging, the company's ROIC and exposure to commodity price volatility highlight the need for more robust reinvestment strategies. The AL-Falah 22/22 plan provides a clear roadmap, but its success will depend on the execution of mechanization, replanting, and diversification initiatives. For investors, the key question is whether THP can transform its current trajectory into a self-sustaining model of growth-one that not only narrows its industry gap but also insulates itself from the cyclical nature of palm oil markets.