Wilmar International Limited - Did Greenpeace report impact customer relationships?

15/12/2013 – Wilmar International has announced a "no peat, no deforestation, no exploitation" policy.

It commits the palm oil giant to conserve High Carbon Stock (HCS) and High Conservation Value (HCV) forests, and to clear land without burning it.

It also says it will not develop oil palm plantations on peat, regardless of its depth.

It will also look to make its supply chain more transparent to avoid exploitation of people and communities.

In addition, Wilmar will become a member of The Forest Trust (TFT), a global non-profit organization that works with businesses to deliver responsible products.

The announcement follows criticism by three NGOs this year.

World Wide Fund for Nature (WWF) and Greenpeace claimed that Wilmar was purchasing illegal palm oil, and Friends of the Earth (FoE) had issues regarding some of its operations in Africa.

However, these issues had no impact on its fundamentals.

Brokers expect Q4 FY13 to remain strong due to a recent rise in the price of sugar and stabilizing soybean crushing margins in China.

Maybank Research reiterated its BUY call but reduced its target price to S$4.30 from S$4.52 after lowering its assumption for pre-tax profit margins for the Palm & Laurics division from US$38/ton to US$35/ton.

It expects the crude palm oil (CPO) price to stay low.

CIMB Research maintained its OUTPERFORM rating with a higher target price of S$4.12 as it believes the stock is trading at only 1.1 times P/B, which is significantly lower than its 5-year historical average of 1.9 times.

DBS Vickers Research has upgraded Wilmar to BUY with a target price of S$3.83.

It expects 6% earnings growth between FY13 and FY16, hence it recommended investors to accumulate the stock.

It is worth noting that we didn't find any analyst report which covered the NGOs' criticisms.

On October 22, Greenpeace published a 31-page report called "Licence to kill" which focused on three issues.

It accused Wilmar of playing a role in clearing tiger habitat by destroying forest within its concessions in Indonesia.

In addition, it also alleged that the Group had sourced fresh fruit bunches (FFBs) from illegal sources, and that it has business relations with a company that it sold in 2005 which was involved in the haze crises in Indonesia in June 2013.

Bustar Maitar, head of the Indonesian Forest Campaign for Greenpeace International, said that household brands like P&G, Mondelez and Reckitt Benckiser that source palm oil through Wilmar are "making consumers unwitting accomplices in the extinction of Indonesia's 400 remaining Sumatran tigers".

The other brands named in the report were Amway, Colgate Palmolive, Twincraft Soap from the United States, Arnott's Biscuits in Australia, biofuels giant Neste Oil from Finland and Godrej from India.

These companies were purchasing "dirty palm oil" that was laundered onto the global market by Wilmar, said Greenpeace on pages 23-24 of the report.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Is it selling "dirty palm oil", as Greenpeace claims?

According to WWF, there were about 50,000 hectares (ha) of encroachment areas inside the Tesso Nilo forest complex in 2011, and 70% of that land had been converted to oil palm plantations.

The complex comprises Tesso Nilo National Park and two selective logging concessions.

Development of oil palm plantations inside the complex was considered illegal.

However, there is an exception for adat (customary land tenure) forest.

But WWF investigations revealed that average plantation size per individual was 50 ha, indicating availability of significant capital.

This is because the size was far above an average smallholding of 2 ha according to the Ministry of Agriculture.

Legally, smallholders are defined as plantations with less than 25 ha.

Surveys have found that more than 95% of the encroachers settling inside the park had come from outside the area, which means adat customary rights would not apply.

A number of palm oil mills, including Wilmar's mills, operate around the complex to accept FFBs from third parties as well as process their own FFBs.

In its 2011-2012 investigation, WWF claimed Asian Agri and Wilmar were buying FFBs grown illegally inside the forest complex.

So, the Roundtable on Sustainable Palm Oil (RSPO) came out with a rule that says oil mills must record the origins of all third party sourced FFBs.

It also said that Asian Agri and Wilmar were cooperating and would stop buying FFBs illegally.

No official complaint was launched during that time.

In fact, Wilmar, in July 2013, informed that it had committed to not buy FFBs illegally.

Wilmar explained that there were overlapping land rights caused by the inconsonance between legal and customary land rights law.

Some of these indigenous community members, on their own accord, then sold their land to other members within their community and/or to outsiders.

These new land owners use the land compensation letter as proof of transfer of rights.

So, one can find a good mix of both indigenous and local people owning parcels of land in various sizes scattered within the Tesso Nilo complex.

But in September and October 2013, Greenpeace found out that FFBs continued to trade within the national park.

Greenpeace also mentioned that it had evidence of trade by Wilmar from companies whose operations include illegal clearance with fires on deep peatland, wholesale rainforest destruction and illegal palm oil plantations within the Park.

For instance, a report released (on 21 November 2013) by FoE claimed that Wilmar purchases 56% of Bumitama Agri's palm oil, the latter accused of illegal logging of land near protected forests in Indonesia.

To Greenpeace's claims, Wilmar clarified that it could not explicitly guarantee that there is no possibility of mixing by suppliers.

In addition, it was trying to establish a fully traceable system through a reduction in volume of supply it received through agents.

But according to Greenpeace, the data that Wilmar provided indicated that nearly one-third of the FFBs received by its three mills in the complex continued to be supplied by agents in 2013.

In addition, Wilmar accepted that it was supplied by a number of non-Wilmar mills in the national park.

Hence, Greenpeace blamed the existing system and management for not keeping an eye on its FFBs supply chain.

Meanwhile, WWF highlighted that three mills owned by PT Citra Riau Sarana, part of Wilmar, near the Tesso Nilo forest complex received FFBs grown illegally.

These mills were scheduled to be certified by the RSPO in 2013 but it is not known whether this has gone ahead.

Question

2. What pressure was it under from customers?

For investors, this is the ultimate question, because it impacts Wilmar in ways a Greenpeace report on its own cannot.

Question

3. How many mills are left to be certified by the RSPO that were scheduled in 2012 and 2013? If there are mills left to be certified in the same years then why is it not yet certified?

Wilmar's biennial sustainability report of 2011 highlight that some of its mills in Central and West Kalimantan, North and South Sumatra, Jambi, Riau were scheduled to be certified by the RSPO in 2012 and 2013 while some were scheduled in 2014 and 2015.

All of its plantations and mills in Malaysia have been RSPO-certified.

According to the 2012 Annual report, Wilmar's Indonesian operations are scheduled to complete certification by 2016.

According to its sustainability report, all mills were scheduled to be certified by 2013, but were postponed to 2015/2016.

(Total number of questions in the full story: 24)

We have sent these questions to the, Ms LIM Li Chuen (Investor Relations), Ms Iris CHAN (Corporate Communications) and Sharon Chong (Senior Manager – CSR) to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

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