Sime Darby Plantation hosted a conference call last Friday on its work progress in addressing the Withhold Release Order (WRO) issued by the US Customs and Border Protection (US CBP). Management targets the release of the CBP summary report by 1Q 2022. Meanwhile, there could be earnings surprise in the 3QFY21 results release next month given the stronger-than-expected CPO prices. Pending our CPO price revision, we maintain our Neutral call with an unchanged TP of RM4.90 based on 28x FY22 EPS.
- Targeting to complete by 1Q 2022. Sime Darby Plantation hopes the independent assessment study by Impactt on its Malaysian operation would be completed by 1Q 2022. Previously, the audit field works by Impactt was affected as the organization was unable to reach the site visits in East Malaysia due to Movement Control 3.0 and inter-state ban. Unannounced site visits are a requirement by the US CBP as certain data collection such as child labour, recruitment process and sexual harassment require physical interviews. We understand that the audit field assessment would require a month to complete under normal circumstances. Upon the assessment submission to US CBP, it will undergo internal reviews and a period of Q&A sessions before coming to the decision on their WRO status.
- Continuous improvement. The Group has now provided individual cabinets to all its estate workers to keep their passports. These cabinets would be located within their living place. Using passport lockers in a centralized location is no longer the only option as the passports are deemed to be under the control of the company. This is because the passport lockers are far away from the worker accommodation and there are cameras in the building where the passport lockers are placed.
- Small earnings impact but credibility at risk. The Group’s sale exposure to the US is negligible as the sales only amounted to USD5m in FY20. However, the prolonged WRO status could raise concerns over the Group’s ESG policy. It will also raise doubts to their multi-national customers over the source of sustainable CPO products.
- Easing concerns for foreign worker shortage issue. The Malaysian operations continue to suffer from foreign worker shortage issue (shortage of 6,000 workers or 19% of requirement) despite being supported by the new recruitment of some local workers to be placed in areas like chemical spraying and fertilizer spraying. However, the acute shortage of harvesters has significantly affected its 2Q-3Q group FFB production. The 3Q group FFB production was down by 2.1% YoY and 4.6% QoQ. Following the government announcement of approving 32,000 foreign plantation workers who have completed their Covid-19 vaccination to be brought into Malaysia in stages, the Group expects to see recruitment of Indonesian workers by year-end.
Source: PublicInvest Research - 25 Oct 2021