FGV hosted a conference call in relation to CBP’s detention order on palm oil from FGV and its subsidiaries. Management highlighted that all issues raised by CBP have been the subject of discourse since 2015, and FGV has taken several steps to rectify the situation since then. Direct impact from the ban will be minimal. While the latest development may not have significant impact on FGV’s earnings (as US and Canada accounted for about 5.3% of FGV’s revenue in 2019), we believe it may still affect its reputation in the international market, hence resulting in knee jerk impact on its near-term share price movement (given its 8% foreign shareholding). We maintain our HOLD rating on FGV, with an unchanged SOP-derived TP of RM1.08.

FGV hosted a conference call in relation to United States Customs and Border Protection’s (CBP) detention order on palm oil from FGV and its subsidiaries. Recall, US has blocked imports of palm oil and palm oil products from FGV and its subsidiaries, following an investigation into allegations it uses forced labour, according to CBP. Shipments from FGV and its subsidiaries were held back at all ports of entry effective 30 Sep 2020.

Issues raised have been the subject of public discourse since 2015. All issues raised by CBP have been the subject of discourse since 2015, and FGV has taken several steps to rectify the situation since then, which include, amongst others, (i) continued strengthening of procedures and processes in the recruitment of migrant workers (which are already in accordance with international standards), (ii) gradual implementation of cashless payroll system for its plantation workers, and (iii) upgrade of housing facilities for its workers.

FGV has also been affiliated with Fair Labour Associations. Besides, management shared that FGV has been affiliated with Fair Labour Association (FLA, a non-profit organisation which promotes adherence to international and national labour laws) since Nov-2019 and committed to uphold FLA standards, address labour issues and drive long-term improvements to manage conditions in its operations and those in its upstream supply chain. As part of its commitment, FGV published its action plan 2020 (based on findings from FLA’s internal gap analysis, feedback from field visits and recommendations provided by Civil Society Organisations working on human and labour rights and migration issues.

Minimal direct impact. Direct impact from the ban will be minimal, as (i) it is only supplying CPKO. to Procter & Gamble (P&G) in Kuantan (its JV partner), and FGV will divert its CPKO to other customer (possibly at lower prices), should P&G decide not to source CPKO from FGV, and (ii) its olechemical plant in US uses mainly coconut oil and tallow as feedstock.

Management believes that it would likely to take months before FGV could be release from the Withhold Release Order (WRO), if previous experienced faced by another Malaysian company is a guide.

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

Maintain HOLD; TP: RM1.08. While the latest development may not have significant impact on FGV’s earnings (as US and Canada accounted for about 5.3% of FGV’s revenue in 2019), we believe it may still affect its reputation in the international market, hence resulting in knee jerk impact on its near-term share price movement (given its 8% foreign shareholding). We maintain our HOLD rating on FGV, with an unchanged SOP-derived TP of RM1.08.

Source: Hong Leong Investment Bank Research - 5 Oct 2020