Highlights from SDPL’s virtual briefing session on latest development of WRO issued by US CBP include (i) management is hopeful to complete the assessment by early-2022, (ii) SDPL faces several challenges in addressing ILO standards, which include, the remote location of its plantation estates, interpretation of recruitment cost, and resetting certain culture standards, (iii) SDPL is still in compliant with RSPO standards, as RSPO carries its own audit on SDPL’s practice, and (iv) the exercise involve cost of RM20-25m arising from the assessment process. Maintain core net profit forecasts, sum-of-parts TP of RM5.05 and BUY rating.

We attended Sime Darby Plantation’s (SDPL) virtual briefing session on the latest development of the Withhold Release Order (WRO) issued by US Customs and Border Protection (CBP) against SDPL.

To recap. The US CBP had on 30 Dec 2020 issued a WRO on SDPL to ban imports of palm oil from the latter, over allegations of forced labour in the production process. In Mar-21, SDPL appointed Impactt Ltd (an ethical trade consultant with specific expertise in detecting and remediating forced labour issues in company supply chains in line with the International Labour Organisation’s 11 indicators of forced labour) as a third party assessor to its Expert Stakeholder Human Rights Assessment Commission (the Commission). On 15 Jul 2021, SDPL dissolved the Commission as it was unable to finish the assessment due to movement and travel restrictions (as a result of Covid-19 pandemic) and the evaluation exercise was taken over by SDPL’s sustainability committee.

Assessment to complete by early-2022. Management shared that it is trying to expedite the assessment in certain areas (particularly, in Sabah and Sarawak, which have already transitioned from Phase 1), and is hopeful to complete them by early2022. Upon completion of the assessment report by Impactt (which will consist of findings and recommendations), SDPL will then work with Impactt on a corrective action plan.

Challenges in addressing to ILO standards. SDPL found several challenges in order to address International Labour Organisation (ILO) standards (which have been increasing over the past few years), and these include, amongst others, the remote location of its plantation estates, interpretation of recruitment cost, and resetting certain culture standards (on group wide basis).

Still RSPO certified. While RSPO’s principles and guidelines overlaps with ILO indicators, management shared that SDPL is still in compliant with RSPO standards, as RSPO carries its own audit on SDPL’s practice. Besides, we understand that SDPL has been constantly engaging with its MNC customers on the progress and update on this matter, and they are either supportive or neutral on the latest progress.

Additional cost of RM20-25m arising from assessment. Management shared that the exercise would involve cost of RM20-25m arising from the assessment process (which includes costs arising from consultation and installation of passport lockers).

Forecast. Maintain, pending release of 2Q21 results on 18 Aug 2021. We note that the cost associated with the abovementioned exercise has yet to be reflected in our forecasts, and our core net profit forecasts of RM1,633m, RM1,191m and RM1,188m in FY21-23 is based on CPO price assumptions of RM3,200/mt in FY21 and RM2,800/mt in FY22-23.

Maintain BUY; TP: RM5.05. Maintain BUY rating with an unchanged sum-of-parts TP of RM5.05. At RM3.43, SDPL is trading at FY21-22 P/E of 14.5x and 19.8x, respectively

Source: Hong Leong Investment Bank Research - 11 Aug 2021