The RSPO Suspended Certification Processes for All of FGV’s Uncertified and Re - Imposed Its Suspension on FGV’s Kilang Sawit Serting for Non-compliance of the Complaints Panel Decision. The Suspension Will be Lifted Upon FGV’s Satisfactory Implementation of the Complains Panel Decision. We Understand That FGV Will Make An Appeal to RSPO’s Decision, Given Its Progress Updates and Action Plans Which Are All in the Process of Being Implemented. We Believe Impact on FGV’s Financials Will Likely be Minimal (as the Latest Suspension Will Not Affect Its Mills Which Have Already Been Certified), Except That It May Tarnish Its Reputation in the International Market. Nevertheless, the Latest Event May Have a Knee Jerk Impact on Its Near Term Share Price Movement, Given Its 8% Foreign Shareholding (as of Dec-19). Maintain BUY With Unchanged SOP-derived TP of RM1.72.

RSPO suspends certification bid for FGV’s non-certified units. The Roundtable on Sustainable Palm Oil (RSPO)’s complaints panel has suspended principles and criteria (P&C) certification processes for all of FGV’s uncertified and re-imposed its suspension on FGV’s Kilang Sawit Serting for non-compliance of the Complaints Panel decision. In the statement made by RSPO, its complaints panel had reviewed 6 audit reports on FGV units and found the results to be unsatisfactory. Among the issues highlighted by RSPO include:

1. FGV’s foreign workers have not been adequately briefed as to their future working conditions prior to joining FGV;

2. FGV continues the practice of signing work contracts of foreign workers in Malaysia, and not at the foreign workers’ country of origin;

3. FGV still fails to ensure that newly hired workers do not pay their agents’ unnecessary recruitment fees prior to joining FGV despite the new policies and procedures implemented since Jan-19;

4. FGV has still not completely phased out the use of contractors in Sabah despite new policies and procedures since Oct-19;

5. Socialisation of many key directives in the Complaints Panel Decision remains incomplete;

6. FGV fails to provide evidence supporting claim that it is monitoring its contract workers to ensure that the pay and working conditions meet the requirement of local labour law; and

7. The number of FGV employed undocumented workers yet to be legalised in Sabah remains to be around 7,000 people.

The suspension will be lifted upon FGV’s satisfactory implementation of the Complains Panel decision, verified by audits conducted by certification bodies in the period of 13 Jan 2020 and 31 Jul 2020. We understand that FGV will make an appeal to RSPO’s decision, given its progress updates and action plans which are all in the process of being implemented.

Comments. Impact on FGV’s financials will likely be minimal (as the latest suspension will not affect its mills which have already been certified), except that it may tarnish its reputation in the international market. Nevertheless, we believe the latest event may have a knee jerk impact on its near term share price movement, given its 8% foreign shareholding (as of Dec-19).

Forecast. Maintain, as we believe impact will likely be insignificant.

Maintain BUY with unchanged SOP-derived TP of RM1.72. We maintain our BUY rating on FGV with an unchanged SOP-derived TP of RM1.72. We note that FGV is a proxy to rising CPO prices, given its high earnings sensitivity to CPO price movement.

Source: Hong Leong Investment Bank Research - 16 Jan 2020