US Customs and Border Protection (CBP) announced that it has sufficient information to determine that the Malaysian palm oil producer, Sime Darby Plantation, uses forced labour and its palm oil products will be subject to seizure by port directors. Forfeiture proceedings will be commenced against its products. Despite seeing a muted financial impact given the current strong CPO price performance and small exposure to the US market, we believe the group’s valuation will continue to erode due to ESG issues. In addition, this could also affect demand for its products from other buyers, particularly, the Europeans. In view of the rising ESG concerns, we revise down our TP from RM4.57 to RM4.12 with a lower PE multiple of 18x (previously 20x). Maintain Neutral call on the stock.

• To recap. Sime Darby Plantation was served with a Withhold Release Order (WRO) by the US CBP on 16 Dec 2020 and the WRO is targeted on all CPO and palm kernel oil and derivative products, made wholly or in part with palm oil traceable to the group. Since then, the group has fully cooperated with the CBP for further finding, which was primarily aimed at its Malaysian operations. In response to those allegations, the group had also appointed an independent ethical trade consultancy to undertake a full-scale, independent, assessment spanning its facilities across Malaysia. However, the works were delayed by the government-mandated Covid-19 restrictions across Malaysia but is now close to completion.

• Disappointing results for Sime Darby Plantation. Following the US findings, the authorities had established that there was reasonable evidence to demonstrate that Sime Darby Plantation harvested the fruits and produced the palm oil using forced labour.

• Muted financial impact but… The ban by the US authorities has minimal muted impact on Sime Darby Plantation as the US market is relatively small for Sime Darby Plantation and the current strong CPO price performance will likely drive another set of strong quarterly results for the group. It is worth noting that Malaysian operations contributed another 36% of the group’s bottomline. However, the US ban could eventually trigger contagious effects to other countries given the rising global concerns over environmental, social and governance (ESG). Its palm oil buyers could also switch their demand to other palm oil suppliers or the refiners might take advantage by asking for a steep discount due to the poor perception of its CPO products.

• It might drag for a period of time. Citing Top Glove as an example, the US CBP ban for alleged forced labour could drag for at least a year before the authority lifts the import ban. This depends on how soon the group can resolve all the issues in compliant with the authorities.

Source: PublicInvest Research - 31 Jan 2022