Investment Highlights

• We maintain SELL on Sime Darby Plantation (SDP) with a fair value of RM4.40/share. We believe that there is more downside to CPO prices than upside as palm production is expected to pick up going forward. Our fair value is based on an unchanged FY23F PE of 18.0x. We ascribe a three-star ESG rating to SDP (Exhibit 1).

• SDP held a briefing yesterday to provide updates on its efforts to resolve the ban on its Malaysian palm products by the US Customs and Border Protection (US CBP).

• Impact is expected to complete the labour audit report on SDP’s palm operations in Malaysia by the end of March 2022. The report will be submitted to the US CBP in April 2022. SDP will then release a summary of the report to the public when it is finalised.

• SDP has not lost any customer due to the issuance of the Notice of Findings status by the US CBP in January 2022. SDP has been selling palm products from its Papua New Guinea unit to multi-national customers in Europe because of the US ban on the Malaysian palm products.

• Due to the various improvement plans that have been implemented, SDP’s total operating costs are expected to increase by 7% to 8% in FY22F. Some of these include expenses for new housing and housing repairs. SDP has allocated a budget of RM700/house/year in respect of workers’ housing and there are almost 20,000 houses in Malaysia. We are keeping our FY22F net profit for SDP for now. We think that the strong CPO prices so far this year will help mitigate the 7% to 8% increase in operating expenses.

• Apart from workers housing, SDP has set up a new grievance channel in addition to the two existing channels. The difference between the new channel and the existing ones is that under the new channel, all cases will go to SDP’s head office for investigation. The new grievance channel called Ululah, is independently managed by Impactt for now.

• SDP has also imposed a cap on workers’ overtime. Workers’ overtime is now limited to fours a day instead of 104 hours/month previously. Also, workers no longer work for more than 14 consecutive days.

• SDP has set up a social dialogue channel where there is a representative for workers in each operating unit that will speak on their behalf to the management. So far, about 26% of the complaints in the social dialogue were related to housing and amenities while another 13% were in respect of workplace repairs.

Source: AmInvest Research - 22 Mar 2022