US CBP had on 28 Jan 2022 issued a notice of finding, in which it has determined that certain SDPL’s palm oil products are produced using convict, forced or indentured labour, and the finding is primarily aimed at SDPL’s Malaysian operations. While its direct presence in US market seems insignificant (and WRO has already been imposed on SDPL since Dec-2020), the latest development may have repercussion on its customers in other regions especially Europe (which accounted for ~23.8% of SDPL’s revenue in FY20), given its emphasis on ESG matters. Nevertheless, SDPL remains confident that the report by independent consultant will demonstrate that the group has internal controls and systems in place to support its workers and ensure their well-being. We lower our sum-of parts derived TP on SDPL by 10.9% to RM4.48, as we lower our P/E and P/B multiples on SDPL’s sum of-parts valuation, as we believe it may take a while before the issue is resolved. Maintain BUY rating as current share price has more than reflected its ongoing ESG concerns. Besides, latest foreign shareholding (8.99% as at 31 Dec 2021) is at an all-time low.

NEWSBREAK

Notice of finding on SDPL labour practice. The US Customs and Border Protection (US CBP) had on 28 Jan 2022 issued a notice of finding, in which it has determined that certain SDPL’s palm oil products are produced using convict, forced or indentured labour, and the finding is primarily aimed at SDPL’s Malaysian operations.

Background. Recall on 16 Dec 20, US CBP issued a Withhold Release Order (WRO) on palm oil products produced by SDPL and its subsidiaries, based on information that reasonably indicated the presence of all 11 of the International Labour Organisation’s forced labour indicators in SDPL’s production process. In response to this, SDPL has since appointed an independent ethical trade consultant to undertake a holistic assessment spanning its facilities across Malaysia. The consultancy work (which was previously delayed by movement control orders across Malaysia) is now close to completion, and we understand that the findings and recommendations (arising from the assessment) are expected be known by end-Mar 2022, if not earlier.

HLIB’s VIEW

While its direct presence in US market seems insignificant (and WRO has already been imposed on SDPL since Dec-2020), the latest development may have repercussion on its customers in other regions especially Europe (which accounted for ~23.8% of SDPL’s revenue in FY20), given its emphasis on ESG matters. Nevertheless, SDPL remains confident that the report by independent consultant (due out by end-Mar) will demonstrate that the group has internal controls and systems in place to support its workers and ensure their well-being.

Forecast. Maintain for now, pending release of 4Q results by end-Feb. Our FY21-23 CPO price assumptions are now RM4,250/mt, RM3,500/mt and RM2,900/mt (vs. RM3,800/mt for FY21 and RM2,900/mt for FY22-23 previously).

Maintain BUY with lower TP of RM4.48. We lower our sum-of-parts derived TP on SDPL by 10.9% to RM4.48, as we lower our P/E and P/B multiples on SDPL’s sum of parts valuation (by 2x and 0.5x respectively), as we believe it may take a while before the issue is resolved. Nevertheless, we maintain our BUY rating on the stock, as we believe current share price has more than reflected its ongoing ESG concerns. Besides, we note that foreign shareholding (8.99% as at 31 Dec 2021) is at an all-time low (since listing in Dec-2017).

Source: Hong Leong Investment Bank Research - 31 Jan 2022