Australia’s Bureau of Meteorology (BOM) declared El Nino has arrived, which is the first since the 2009-2010 episode. An El Nino event significantly increases the probability that the sector has hit a trough. We remain OVERWEIGHT on the plantation sectors in Singapore and Indonesia and are still NEUTRAL on Malaysia on relative valuations.

• This time is for real. El Nino failed to develop last year, after months of being in an “Alert” stage. The BOM did not declare an El Nino last year despite warning about the high probability of it occurring. The US Climate Prediction Center declared the El Nino earlier in February.
• No confirmation on the ground yet. We have yet to see heat waves hitting palm oil production regions although this usually takes a little time to happen. It is crucial for the oil palm region to experience drought in order for it to have an impact on production (and hence, prices) although for investment purposes, one could ill-afford to wait for confirmation.
• Price likely to react. We expect the price of palm oil to react to the potential production disruption, although a more significant move may only be seen when production actually suffers from this effect. We note that during 2009-2010, production was impacted significantly enough to drive the price of palm oil to MYR4,000/tonne.
• Increase exposure to Malaysia. Since Indonesia tends to experience El Nino first as it is located further south compared to Malaysia, we advocate that investors raise their exposure to Malaysia plantation stocks. We have BUYs for IJM Plantations (IJMP MK, TP: MYR4.05), Genting Plantations (GENP MK, TP: MYR12.15) and Sarawak Oil Palms (SOP MK, TP: MYR7.07).
• Indonesia exposure is still a must. Despite the higher production risk, Indonesia planters remain a good exposure to have as their valuations are cheaper and their upside greater. Our preferred BUYs are First Resources (FR SP, TP: SGD2.54), Astra Agro Lestari (AALI IJ, IDR28,337) and Bumitama Agri (BAL SP, TP: SGD1.44).