Financial impact likely limited. While SMART did not reveal how much Nestle contributed to its sales, we understand that it is likely pretty insignificant at less than 0.5% of overall sales; this as the group sells most of its CPO to customers in China and India, where demand for CPO is expected to track the rapid urbanization in these countries. As such, the financial impact from the latest development, if any, will probably be very limited for GAR, although SMART may suffer some minor setback to its reputation. On that note, we believe that the adherence to guidelines laid out by RSPO (Roundtable for Sustainable Palm Oil) will become more important as the Nestle development suggests that businesses are paying more attention to “green practices”.
Maintain BUY with S$0.66 fair value. However, the push for full RSPO-certified CPO is still expected to be quite gradual; a Dow Jones report estimates that the total amount produced through sustainable methods is still quite small at 1.5m tons, as compared to the 45m tons of annual CPO output globally. As such, we continue to remain upbeat about GAR’s medium-term prospects and maintain our BUY rating and S$0.66 fair value.
Indeed, it is true that the direct contracts with Nestle constitute but a tiny fraction of Sinar Mas' overall sales and the immediate short-term financial impact is likely to be negligible.
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However, Carey has conveniently ignored the high probability of other customers and intermediaries cutting Sinar Mas from their value chains. Cargill and IOI, both major intermediaries and purchasers of palm oil from Sinar Mas, are coming under pressure from environmental groups and customers for not terminating their purchases from now notorious illegal deforester Sinar Mas. Indeed, Nestle itself is putting pressure on Cargill to ensure that Sinar Mas is eliminated completely from its value chain. IOI has also recently come under fire for its environmentally destructive practices in the development of Indonesian Palm Oil plantations. The chance of further financial impact is not insignificant.
In any case, whether or not Sinar Mas eventually suffers financially from its fracas, I find it distasteful and socially irresponsible for OCBC to promote a business that wilfully and illegally destroys high conservation value rainforest while claiming that it is a responsible member of the "Roundtable of Sustainable Palm Oil." Through the promotion of Golden Agri stock, OCBC shows that it is willing to turn a blind eye to environmentally destructive practices and corporate social hypocrisy, in the pursuit of profits.
And just a point of note - in a detailed comparative profitability analysis of the 5 SGX listed palm oil stocks, Golden Agri has come in last, by a mile.
Hence, how on earth can any analyst with a conscience consider Golden Agri to be a buy?