FGV held a briefing on CBP Issues Detention Order on palm oil produced with forced labour in Malaysia by United States Customs and Border Protection (CBP) on Friday afternoon. The key take-aways from this meeting are highlighted below.

Background

On 30th Sept, US’s CBP has placed a detention order on palm oil and palm oil produced made by FGV (its subsidiaries and JV) with the indication of the use of forced labour in Malaysia. According to FGV, all the issues raised have been the subject of public disclosure since 2015, which FGV has taken several steps to correct the situation. Based on the process done by other companies which have encountered the same issue, FGV will probably take several months to conclude – and this too depends on the independent audit firm which they intend to appoint to audit FGV’s operations especially labour practices. FGV is also in communication with US-based Legal counsel, the Malaysian Embassy, Ministry of Foreign Affairs and Ministry of Human Resources to solve the issues.

FGV’s response and action plans

FGV has committed to continue to engage with CBP to submit the FLA Assessment Report together with other additional supporting evidences. Off note, FGV has submitted 2 petitions to CBP back in June and Sept 2019 regarding labour practices and improvement made by FGV. The only response received from CBP was WRO on the 25th Sept 20, indicating that the evidence was insufficient. To recap, FGV has done various efforts in honouring its commitment to respect human rights and to uphold labour standards which include inter-alia: 1) strengthening its Guidelines and Procedures for responsible recruitment of foreign workers by establishing 4 one-stop centres in Malaysia and in source countries namely in India and Indonesia, 2) no involvement in any recruitment or employment of refugees – migrant workers mainly from India and Indonesia of which in Aug 20, FGV has 11,286 Indonesian workers and 4,683 Indian workers which cumulatively formed the majority of FGV’s plantation workforce, 3) pioneering the implementation of the electronic wallet cashless payroll system for plantation workers, which gives empowerment to the workers to manage their own financial, and 4) fulfilling the rights of workers to adequate housing - over the past 3 years, FGV has invested approx. RM350m to upgrade housing facilities for its workers.

Worst case scenario

We are of the view that a worst-case scenario would be that the detention issue is protracted and will result in 1) loss of current and potential customers – if they decide to reassess their ESG practices, and 2) loss of current and potential revenue – US constitute about c. 4-5% of FGV’s revenue. Nonetheless management guided that FGV does not have any direct CPO bulk sales to US and such, the impact is minimal. YTD, the Group only export 40 tonnes of shortening, valued at USD27k to US. In the worst-case scenario, FGV would re-route its PO produced to other markets if Procter & Gamble, its JV partner decide to restraint their global ties.

Maintain forecast for now

Maintain earnings forecast with unchanged TP of RM1.04 based on P/B of 0.8x and 3-yrs avg. BV/share of RM1.30. We expect performance of Palm Product segment in the coming quarter to sustain given that current palm product prices are trading above 2019 prices with production is at its peak productive quarters. Management guided that sales in fourth quarter is already locked and to remain intact.

Source: BIMB Securities Research - 5 Oct 2020