Ferrero had on 4 Apr requested all its direct suppliers to stop supplying Ferrero with palm oil and palm kernel oil sourced indirectly from SDPL until further notice. In a move not previously reported, Cargill also said it had earlier in Mar, suspended purchases from SDPL, pending more information of the latter’s measures to address the labour allegations. While the latest decisions by Ferrero and Cargill reignite investors’ ESG concerns on SDPL, impact on share price will likely be knee jerk, as (i) financial impact on SDPL should be minimal, as we believe SDPL is able to divert its products elsewhere, given the tight supply of vegetable oils, and (ii) it has already taken necessary steps to address these ESG concerns. Maintain earnings forecasts, sum-of-parts derived TP of RM5.95, and BUY rating.

Ferrero stopped buying palm oil from SDPL. Italian confectionary giant Ferrero had on 4 Apr 2022 requested all its direct suppliers to stop supplying them with palm oil and palm kernel oil sourced indirectly from SDPL until further notice, following the US Customs and Border Protection’s (US CBP) issuance of notice of finding on 28 Jan 2022. To recap, the notice has determined that certain of SDPL’s palm oil products are produced using convict, forced or indentured labour, and the finding is primarily aimed at SDPL’s Malaysian operations.

Cargill suspended purchases form SDPL since Mar-2022 too. In a move not previously reported, US commodities giant Cargill said it had in Mar-2022 suspended purchases from SDPL, pending more information of the latter’s measures to address the labour allegations. In its website, Cargill said SDPL had taken “very constructive and potentially transformative” steps, but it needed more information to determine if SDPL was meeting its sustainability standards.

In FY20, Europe accounted for 24% of SDPL’s revenue.

HLIB’s VIEW

While the latest decisions by Ferrero and Cargill reignite investors’ ESG concerns on SDPL, impact on share price (which has retraced by -4.3% on Friday) will likely be knee jerk, as (i) financial impact on SDPL should be minimal, as we believe SDPL is able to divert its products elsewhere, given the tight supply of vegetable oils, and (ii) it has already taken necessary steps to address these ESG concerns as evident by its recent implementation of continuous improvement plan to address the 11 International Labour Organisation (ILO) indicators of forced labour. Besides, we understand that the independent assessment report by Impactt is due to be released soon, as SDPL is currently going thru its internal process of approval of such report.

Forecast. Maintain for now, pending release of 1Q22 results by May-22. Our forecasts are based on FY22-24 CPO price assumptions of RM4,300/mt, RM3,300/mt and RM3,300/mt.

Maintain BUY with unchanged TP of RM5.95. We maintain our BUY rating on SDPL with an unchanged sum-of-parts TP of RM5.95 (see Figure #1). SDPL remains one of our top picks for the sector, due to its high operating leverage to CPO price. At RM5.07, SDPL is trading at FY22-24 P/E of 15.2x, 21.1x and 20.0x, respectively.

Source: Hong Leong Investment Bank Research - 18 Apr 2022