WHILE its direct presence in US market seems insignificant with the withhold release order (WRO) having been imposed since December 2020, the latest findings of forced labour elements by the US Customs Border Protection (CBP) may have repercussion on Sime Darby Plantation Bhd’s customers in other regions especially Europe.
This is given the continent which accounted for circa 23.8% of Sime Plantation’s revenue in FY2020 places immense emphasis on environmental, social and governance (ESG) matters, according to Hong Leong Investment Bank (HLIB) Research.
“Nevertheless, Sime Plantation remains confident that the report by its independent consultant (due out by end-March) will demonstrate that the group has internal controls and systems in place to support its workers and ensure their well-being,” analyst Chye Wen Fei pointed out in a company update.
On Jan 28, the US CBP issued a notice of finding in which it has determined that certain Sime Plantation’s palm oil products are manufactured using convict, forced or indentured labour with the findings being primarily aimed at the company’s Malaysian operations.
Recall that the US CBP had on Dec 16, 2020 issued a WRO on palm oil products manufactured by Sime Plantation and its subsidiaries based on information that reasonably indicated the presence of all 11 of the International Labour Organisation’s (ILO) forced labour indicators in its production process.
This led to Sime Plantation appointing an independent ethical trade consultant to undertake a holistic assessment spanning its facilities across Malaysia.
As a consequence, HLIB Research slashed its sum-of-parts (SOP)-derived target price of Sime Plantation by 10.9% to RM4.48 (from RM5.03 previously) as “we believe it may take a while before the issue is resolved”.
“Nevertheless, we maintain our “buy” rating on the stock as we believe its current share price has more than reflected its ongoing ESG concerns. Besides, we note that foreign shareholding (8.99% as of Dec 31, 2021) is at an all-time low (since its listing in December 2017),” added the research house.
Even as the financial impact to Sime Plantation has been muted thus far, Maybank IB Research observed that RM9.1 bil (-26%) in the company’s market cap has been wiped off since the WRO.
“While the market appears to have priced in the worst, we do not rule out possible negative kneejerk reaction following this (the latest) findings,” opined analyst Ong Chee Ting.
Nevertheless, the research house me maintained its “buy” rating on Sime Plantation with an unchanged revised net asset value (RNAV)-derived target price of RM4.47.
At 10.30am, Sime Plantation was down 14 sen or 3.66% to RM3.69 with 2.26 million shares traded, thus valuing the company at RM25.52 bil. – Jan 31, 2022
