We raise our TP to MYR4.05 (from MYR3.50, 16% upside) and upgrade our rating to BUY. Palm oil prices remain lacklustre and investor interest in the sector is muted. Nevertheless, commodity downcycles do not last forever and we believe the current cycle has already bottomed. We lower our CPO prices but roll forward our valuations, as we believe investors should start looking ahead into 2016.

• Lacklustre prices but cycle has bottomed. Palm oil prices are still lacklustre and investor interest in the sector is muted. We think this is understandable as the palm oil price has been in a multi-year downcycle. Nevertheless, commodity downcycles do not last forever and we believe the current cycle has already bottomed.
• Indonesia and Malaysia’s biodiesel mandates could be a catalyst. Pending the implementation of Indonesia’s B10 biodiesel programme, palm oil prices have languished so far this year. YTD average is only at MYR2,260 compared with our previous average assumption of MYR2,500. We reduce our 2015 price assumption to MYR2,350, which still implies stronger prices going forward. Biodiesel mandates in both Malaysia and Indonesia could still jump-start palm oil prices as the quantum of demand is significant. We expect the average price to strengthen to MYR2,500/tonne next year.
• Long-term CPO production growth slowing. While biodiesel may jump-start palm oil prices, a sustained upcycle in prices is usually supported by a structural slowdown in production growth. Judging from the slowdown in new planting in Indonesia, this may happen by 2017 at the latest.
• Cutting FY15-16 CPO prices. We revise our CPO price assumptions for IJM Plantations (IJMP) to MYR2,300/tonne for FY15 (Mar) (from MYR2,425), MYR2,400 for FY16 (from MYR2,500) and MYR2,525 for FY17 (from MYR2,500). We adjust our earnings forecasts by -5.4%, -7.5% and -0.6% for FY15, FY16 and FY17, respectively.
• Rolling forward valuation to 2016. We also roll forward our SOP-based TP to 2016 (from 2015), which raises our TP to MYR4.05 (from MYR3.50), implying 16x 2016 P/E. Given IJMP’s strong FFB growth and robust earnings growth, valuations for 2016 are now at more attractive levels. As such, we upgrade the stock to BUY (from Neutral).