Voluntary in nature, but still lacking in details

FGV confirmed a press report that it has voluntarily suspended its RSPO certification in Malaysia. Although FGV is a big supplier of certificated sustainable palm oil (CSPO), the CSPO premium received is small relative to its revenue base. But against its small earnings base, the foregone CSPO premium could be material. Pending details, we are keeping our forecasts unchanged. Maintain SELL & MYR1.33 TP on 1x historical PNTA.

FELDA Group initiated voluntary RSPO suspension

FGV announced that FGV and FELDA Group withdrew the Roundtable on Sustainable Palm Oil (RSPO) Principles and Criteria certificates of their 58 complexes located in Malaysia effective 3 May. This exercise does not affect FELDA Group's RSPO Supply Chain Certification System (SCCS) certificate of its kernel crushing plants and downstream refineries. FELDA Group is now addressing all sustainability issues along the supply chain. This exercise will allow for a more inclusive certification between commercially managed plantations by FGV and FELDA smallholders.

Proactive measure to address fresh allegations?

Few details were provided in the Bursa announcement but we suspect the voluntary suspension could be due to (1) an ongoing RSPO enquiry on FELDA’s foreign labour practices following WSJ’s report in 2015, and (2) fresh allegations of unverified “non-sustainable” practices by Chain Reaction Research (issued in April 2016). FELDA has close to 600,000 ha of certified area with ~1.8m MT p.a. of CSPO certificates, but largely in the Mass Balance category which generates the lowest CSPO premium.

Low CSPO premium but material to bottom line

Based on its 2015 Annual Report, FGV’s sales to Europe and North America amounted to MYR1.1b or 7% of 2015’s total revenue. We hear from the market that FGV enjoyed a CSPO premium of ~MYR20m (or less than 1% of group revenue), translating to an after-tax profit of less than MYR15m. But against our low FY16-17 core net profit forecasts of MYR141m-252m, this could be material at 11%/6% respectively.

Source: Maybank Research - 4 May 2016