Ensure palm oil goods continue to enter EU once new law takes effect next year
21/11/2023 (New Straits Times), Kuala Lumpur - As the European Union (EU) deforestation rule (EUDR) approaches its December 2024 compliance deadline, all hands must be on deck to ensure that palm oil products may continue to enter the EU market after the rule takes effect, said RHB Investment Bank Bhd (RHB IB).
Governments must make sure definitions are in line and the issue is not transferred while businesses make every effort to comply, it said.
According to RHB IB, more established businesses will be able to comply with EUDR by the deadline.
"We believe the bigger and more established players will do better in complying with the EUDR by the deadline, taking advantage of the potential gap filled by the smaller palm oil suppliers.
"Our buys for EUDR readiness are Kuala Lumpur Kepong with a target price (TP) of RM25.80, IOI Corp Bhd with a TP of RM4.80, Golden Agri with a TP of SG$0.30 cents, Bumitama Agri with a TP of SG$0.70, and Wilmar International Limited with a TP of SG$0.40 cents," it said in a note today.
While there are a myriad of problems and issues in complying with the EUDR guidelines based on current regulations, RHB IB believes there are also numerous solutions.
The Malaysian and Indonesian governments working together with the EU to find solutions is a step in the right direction, especially if Malaysia and Indonesia are classified as "low-risk.".
"Aligning definitions is key to achieving compliance and ensuring everyone is on the same page," it said.
At the end of the day, if the EU fails to help producing countries like Indonesia and Malaysia comply with the EUDR, it will push producers to export more of their commodities to countries with weaker environmental regulations, thereby shifting the problem to other regions.
However, a short-term solution would be to ensure that whatever is sold to the EU is produced in segregated mills and refineries and traceable to plantations.
"This could mean redirecting smallholder crops that are not traceable to other mills to ensure there is no mixing of crops in each plant," said RHB IB.
As smallholders manage 40 per cent of plantation areas in Indonesia and Malaysia, this sector will only progress if they are taken care of and well updated with the changes in laws and regulations.
As discussed previously, the main hurdle to achieving traceability lies in obtaining data from third-party suppliers, including smallholders.
Therefore, in order to address this, continuous engagement with the smallholders is essential to educate them on the importance of establishing a sustainable business, and the necessary tools must be given to the smallholders to help them achieve these goals.
"However, we note that there are some outliers that have yet to make any improvements to environmental, social, and corporate governance (ESG) disclosures as well as ESG targets.
"We have made several changes to our ESG scores, which have altered the TPs for the stocks under our coverage. However, no changes have been made to our stock recommendations or our earnings estimates.
"Hence, we maintain a neutral recommendation with a tactical trading strategy," added RHB IB.