Strategy Note /

Three palm oil producers that adhere to ESG and are good value

  • We outline the parameters of the Global Standard for Sustainable Palm Oil

  • We assess the extent to which listed palm oil players adhere to these standards

  • We identify Golden Agri, FGV and Indofood Agri as producers that are both undervalued and adhere to palm oil standards

Three palm oil producers that adhere to ESG and are good value
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
12 October 2021
Published byTellimer Research

The palm oil industry has been under pressure from environmentalists for over 20 years. In 2005, several leading palm oil producers created the Roundtable for Sustainable Palm Oil (RSPO). The body set out to create a standard for sustainable palm oil.

In 2007, the RSPO formulated Principles & Criteria for Sustainable Palm Oil. This created a new standard of palm oil that was green-certified. It typically trades at a premium.

The RSPO seeks to assure transparency and credibility through these criteria.

The key criteria of 'green' palm oil are as follows:

The key criteria of green palm oil

We outline the RSPO supply chain below:

Palm Oil Supply Chain

Investors typically rate palm oil producers on financial metrics such as EV/EBITDA and PE multiples. The industry valuations for EV/EBITDA and PE multiples are two standard deviations below the 20-year mean, despite palm oil prices trading at a 10-year high.

On EV/EBITDA, four companies stand out: Golden Agri, Sinar Mas, Indofood Agri, and FGV Holdings. These stocks are trading in the 4-6x EV/EBITDA valuation range.

Palm oil: Comparative valuation table

Golden Agri and First Resources are two outliers among palm oil producers. They have outperformed the palm oil price in 2021, while most of the players have underperformed.

YTD Performance of Palm Oil Producers

ESG considerations and share price performance are not mutually exclusive in the palm oil sector

Bloomberg rates companies on their ESG disclosure standards. A score of 100 would be perfect and 0 would be dreadful. We present the ESG disclosure scores for the palm oil producers below:

Bloomberg ESG Disclosure (Rating)

Three of the four outliers on an EV/EBITDA basis (Golden Agri, Indofood Agri, and FGV Holdings) do relatively well here too, with Bloomberg ESG disclosure scores of over 40 (higher than the average for the sector).

Not all palm oil producers should be tarnished with the same brush, and these three companies seem like attractive opportunities in terms of both financial metrics and ESG standards.