Current S$0.64
Target S$0.81
Previous Target S$0.81
Up/downside 26.56%
Regaining Unilever as a customer is another feather in the cap for the group in its quest to become a leading sustainable palm oil producer. This will boost the group’s reputation and downstream sales.
The group could regain sales equivalent to about 3% of revenue. While it does not change our earnings forecasts, it will help bolster its environmental credentials. Still TRADING BUY for the potential short-term bounce due to this news, its attractive valuations.
What Happened
97.2%-owned PT SMART received a purchase order from Unilever yesterday. This is viewed as an acknowledgment of its commitment to sustainability after some of its estates received their Roundtable on Sustainable Palm Oil (RSPO) certification. This is Unilever’s first order since it stopped buying palm oil from Golden Agri in Dec 2009 after the environmental campaign group Greenpeace alleged that the group had cleared forests and environmentally-important peat land to make way for plantation estates.
What We Think
This is a positive development but not a surprise to us. We had earlier expressed the strong possibility of Unilever returning as a customer after Golden Agri received RSPO certification for 14,955 ha of estates on 19 Sept 2011. Unilever is the second customer that has resumed palm oil purchases from the group after a 22-months hiatus. Nestle rejoined the customer list about a month ago. Of the two, Unilever is a larger customer accounting for 3% of the group’s total sales in 2008 vs. 0.2% by Nestle. This news also comes at an opportune time as the group sets out to expand its downstream sales following Indonesia’s recent decision to lower export tax on refined palm oil.
What You Should Do
This development will not impact our earnings forecasts as we have already factored-in higher sales for its downstream operations. However, this and recent events clearly demonstrate the group’s ability to successfully bounce back to restore its sustainable image after being blacklisted by some customers and investors since 4Q09 and 1Q10. It will help improve the group’s appeal to environmentally-conscious investors and buyers. We continue to advocate a Trading Buy as this news could help re-rate the stock.
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