After being prohibited for two years, SIMEPLNT can resume exporting palm products exports to the US again, effective 3 Feb 2023. The financial impact is negligible but it does bring closure to a serious allegation. However, we maintain our UNDERPERFROM call and TP of RM3.65 as easier CPO prices amidst cost inflation are capping prospects of margin expansion moving ahead.
In Dec 2020, the United States Custom and Borders Protection (USCBP) raised the issue of “forced labour" against SIMEPLT and issued a Withhold Release Order (WRO) to detain raw palm oil and processed products containing palm oil produced by SIMEPLT at all US ports, essentially preventing such products from entering the US. The decision was based on sufficient though not conclusive information or evidence, triggered apparently by a petition sent to the USCBP in Apr 2020 by an NGO, Liberty Shared. On 3 Feb 2023, the USCBP “modified” this WRO, allowing SIMEPLT to resume exports of palm oil and palm products to the US once again.
Commercially, the US is a small market not only for SIMEPLT but for palm oil as a whole. Although the US is a big edible oil market (25m MT a year), it uses only 1-2m MT of palm oil each year, out of which only 0.6m MT comes from Malaysia. As such, Malaysia’s palm oil deliveries to US often comprise just 3% of the country’s total palm oil exports. Overall, the palm oil trade has become increasingly regional, with the Asia Pacific producing 90% and consuming 60% of the entire world’s palm oil output. Indonesia is by far the single largest producer (50m MT) and user (20m MT) of palm oil. A quarter of the world’s palm oil is absorbed by Indonesia alone followed by India (11%) and China (8%). Likewise, the Asia Pacific is also the main market for edible oils rather than the US or EU though they are still sizeable markets.
Reputational risk is the main concern. For one, SIMEPLT prides itself as the largest producer of certified palm oil in the world. Such an allegation can potentially dent or even nullify such claims. Secondly, SIMEPLT is part of the Sime Darby group, a century old establishment with presence across the region including ties with global partners such as Porsche, BMW and Jaguar to name a few. The group’s status as a government linked corporation (GLC) may not help as criticism against the group may have indirect bearing on the government as well. A satisfactory closure is thus welcome news for SIMEPLT.
Forecasts. We are keeping SIMEPLNT’s FY22F and FY23F CPO prices at RM4,000 per MT and RM3,800 per MT, respectively. PATAMI and core EPS are also maintained pending 4QFY22 results next Friday (17 Feb).
Maintain UNDERPERFORM and TP of RM3.65. SIMEPLNT offers defensive land-rich NTA, improving gearing from pending divestment of 949 acres for RM618m to SIMEPROP and decent margins as CPO prices should continue to stay firm. The USCBP lifting or “modification” of WRO ruling is also positive for the group. However, rising operating cost is a sector-wide concern and with historically above average operating costs, weaker ROEs and trading at 21% above our TP, SIMEPLT looks expensive for the moment. Our TP of RM3.65 is derived from 15x FY23F CEPS with no ESG premium in view of the group’s average 3-star scoring.
Risks to our call include: (i) weather impact on edible oil supply, (ii) favourable commodity prices fluctuations, and (iii) easing of cost inflation.
Source: Kenanga Research - 7 Feb 2023