• Maintain NEUTRAL and MYR5.30 TP, 6% upside. Sime Darby Plantation has outlined its continuous improvement plan to address any gaps in its adherence to the 11 International Labour Organisation (ILO) indicators. We are positive on these initiatives and hope that this will result in the lifting of the US Customs and Border Patrol (CBP) ban. Nevertheless, we believe valuations are fair at current levels, given the recent run-up in share price.

• Continuous improvement plan to address allegations. SDPL is at the tail end of Impactt’s assessment and, with this, it has developed a continuous improvement plan to address any gaps it may have in line with the 11 ILO indicators. This plan has been put in place across 342,000ha of land and 150 operating units in Malaysia, involving some 24,000 workers (15,000 of which are foreign workers). The Impactt report will be ready by the end of March, and SDPL will release its findings to the CBP as well as a summary to the public. With the implementation of this plan, SDPL does not expect to have to make any more major changes, upon release of the Impactt report.

• SDPL is now placing emphasis on seven workstreams named Grievance channels, Occupational Health and Safety and Workers Housing, Social Dialogue, Estate Issues – Relating to Forced Labour Initiatives, Operational Intervention, Wage Structure, and KPI (Figure 3).

• Roundtable For Sustainable Palm Oil (RSPO) not involved at the moment. While this assessment has been conducted, the RSPO was not involved in collaborating or corroborating with the independent consultants. However, SDPL believes it continues to fulfil RSPO standards – particularly Principle 6 (“Responsible consideration of employees and of individuals and communities affected by growers and mills”).

• SDPL expects to see a 7% increase in total costs to implement all these changes, which includes payments for consultants, IT and infrastructure, and repairs and maintenance, amongst others. This does not include the remediation fee of MYR82m, which was incurred in FY21. SDPL has not seen any major changes to its customer base as a result of these allegations, but is now servicing its multinational customers via palm oil from Indonesia and Papua New Guinea to avoid any issues. We have already imputed a 10-15% rise in CPO unit costs, and higher operating expenses in our FY22 forecasts, to account for the higher ESG compliance costs.

• Still NEUTRAL. We are positive on SDPL’s initiatives and are hopeful that this will result in the lifting of the CBP ban eventually. Our SOP-derived TP remains MYR5.30, based on 18x 2022F P/E for the plantation unit, and 12x 2022F P/E for the downstream division. We make no changes to our ESG score for the time being, and will likely only review it if there is a change to the CBP ban. Our TP currently includes an ESG discount of 12%, to account for SDPL’s ESG score of 2.4.

Source: RHB Research - 22 Mar 2022