Key highlights from SDPL’s virtual briefing include (i) various initiatives have been undertaken in addressing concerns on its labour practice, and these initiatives are in the process of being replicated to its other operating countries, (ii) since lifting of WRO, SDPL has been receiving immediate enquiries from customers in US, and (iii) additional costs arising from various initiatives implemented to improve its labour practice will be compensated by becoming the customers’ top-tier suppliers, which usually command better prices to its products. Besides, SDPL does not see EU’s recent deforestation regulation as a major risk. Maintain earnings forecasts, HOLD rating, and TP of RM4.49 based on unchanged 18x FY24 core EPS of 24.9 sen.

Post United States Customs and Border Protection’s (USCBP) modification of forced labour finding against SDPL (on 3 Feb 2023), SDPL hosted a virtual briefing to share more details in relation to USCBP’s modification.

Various key improvement initiatives have been undertaken since WRO. Since the imposition of the Withhold Release Order (WRO) by USCBP in Dec-20, SDPL has undertaken various initiatives to in addressing USCBP’s earlier finding, which include amongst other, enhancement of grievance channels, engaging social dialogues with employees, improving workers’ living conditions, helping workers to better understand how wages and overtime are calculated, and enhancing ethical recruitment (including reimbursement of recruitment fees to foreign workers). We understand that SDPL is also in the process of rolling out the initiatives in its other operating countries (i.e. Papua New Guinea and Indonesia) based on certain customisations.

More enquiries from US customers. Management is positive that the change in the company’s product status will lead to more export demand from US, as it has been receiving immediate enquiries from customers in US following USCBP’s modification of forced labour finding.

Status on reimbursement of recruitment fees. Recall, SDPL had earlier on set aside RM82m to reimburse its foreign workers that have paid recruitment fees to agents and other third parties. Management shared that 38% of the workers have been reimbursed so far, and it is due to update USCBP on the status of reimbursement by end-Dec 2023.

Additional costs arising from initiatives undertaken will be compensated. Apart from consultant fees and remediation of reimbursement recruitment fees to foreign workers (which amount to ~RM140m, and non-recurring in nature), management shared that the various initiatives implemented to improve its labour practices will result in ~3% increase in its total cost to customers, and it is hopeful that such additional cost will be compensated by becoming the customers’ top-tier suppliers, which usually command better prices to its products.

On side note, no impact from EU’s deforestation regulation. Management does not see EU’s recent deforestation regulation as a major risk, as it is committed to a traceable and sustainable supply chain.

Forecast. Maintain for now, pending for more update from its upcoming results announcement (due out by end-Feb).

Maintain HOLD, with unchanged TP of RM4.49. We maintain our HOLD rating on SDPL with an unchanged TP of RM4.49 based on unchanged 18x FY24 core EPS of 24.9 sen.

Source: Hong Leong Investment Bank Research - 10 Feb 2023