Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with a lower fair value of RM3.80/share vs. RM4.90/share previously. We cut our FY22F PE assumption for SDP to 22.0x from 25.0x originally. We also lower SDP’s FY22F net profit by 6.0% to reflect a weaker FFB growth of 4.0% compared with 9.0% previously. We reduce SDP’s PE assumption to reflect the de-rating of the palm oil sector due to ESG risks.

• On Monday, SDP held a virtual meeting to provide updates on its efforts to lift the ban on its Malaysian palm products in the USA. A silver lining is that SDP has not lost any customer recently. SDP’s exposure to the USA is small. The group’s sales to the USA was only US$5mil in FY20.

• SDP hopes that the assessment study on its Malaysian operations would be completed in early FY22F. Although Impactt has completed interviews with 1,600 workers, the organisation has not been able to conduct site visits in East Malaysia due to MCO 3.0. Unannounced site visits are a requirement by the US Customs and Border Protection (CBP) as certain indicators such as sexual harassment and child labour require face-to-face interviews. We understand that the field assessment would have taken a month to be completed under normal circumstances.

• SDP has changed certain processes based on some feedback. First, it would be building lockable cabinets for the estate workers to keep their passports. These cabinets would be placed next to the estate workers’ beds in their houses. Using passport lockers in a centralised location is no longer acceptable as the passports are deemed to be under the control of the company. This is because the passport lockers are far away from the workers and there are cameras in the buildings where the passport lockers are placed.

• Also, SDP would be recruiting an independent third party to undertake its grievance channels. In the future, the person who answers the telephone calls would be able to converse using the maiden language of the foreign workers. Documents such as payslips may also be in the workers’ native language. SDP is also exploring explaining the calculation of the wages in the payslips.

• SDP is working with a consultant on implementing controls and processes on workers’ recruitment. Currently, SDP bears the recruitment costs from the stage of the interview and the individual accepting the job. Amongst other things, the issue is the cost of the worker’s passport. If the foreign worker has to pay for his passport to enter Malaysia, it is unclear if the company has to bear the cost of the passport.

Source: AmInvest Research - 11 Aug 2021