• Reuters reported that Italian confectionery giant, Ferrero will stop sourcing palm oil from Sime Darby Plantation (SDP) after the US CBP (Customs and Border Protection) found that SDP used forced labour.

• On 6 April, Ferrero requested all its suppliers to stop supplying Ferrero with palm oil and palm kernel oil sourced directly or indirectly from SDP until further notice.

• Ferrero said it does not buy directly from SDP, which supplies 0.25% of its palm volume. Ferrero’s products and brands in the US stopped sourcing from SDP in January 2021.

• In the same article, Reuters also reported that Cargill has suspended purchases from SDP since March 2022. Cargill declined to say how much palm oil it sources from SDP. SDP said that its supply of bulk products to Cargill in India has been taken up by other customers.

• We view these developments negatively as they affect SDP’s reputation and credibility. The concern is that other customers will follow suit. Previously, SDP said that it has not lost any customer since its Malaysian palm products were banned in the US in late FY20.

• Also in March 2022, SDP said that it would be supplying palm products from Indonesia and Papua New Guinea to its customers in the EU instead of products from Malaysia.

• In FY20, the US accounted for only US$5mil of SDP’s revenue. The EU accounted for a large 23.8% or RM3.1bil of SDP’s revenue of RM13.1bil in FY20. India made up RM1.9bil or 14.5% of SDP’s revenue in FY20.

• SDP is expected to submit the audit report on its labour practices to the US CBP in April 2022. The group is anticipated to release a summary of the findings to the public upon the report finalisation.

• We maintain SELL on SDP with a fair value of RM4.40/share. Our fair value for SDP is based on a FY23F PE of 18x, which is below the multiple of 22x that we have used to arrive at the fair values of the other plantation companies. We applied a discount to account for the risk of SDP losing its customers due to the ban by the US CBP. The target PE of 18x is within SDP’s two-year PE band of 14.4x to 52.6x.

Source: AmInvest Research - 18 Apr 2022