We believe El Nino’s impact on edible oil supply will be one of the largest ever, given its current strength, and as such are raising our CPO price estimates to MYR2,700/tonne for 2016 (from MYR2,500). We raise our SOP-based TP to MYR0.68 (from MYR0.54), implying 6% upside. No change to our Neutral recommendation. We highlight the risk of it being excluded from the Shariah Index come the next review in mid-Nov.

Unprecedented impact. We believe El Nino’s impact on edible oil supply will be its biggest ever given its strength and high global reliance on palm oil. In the last mild El Nino in 2009 – 2010, palm oil price went ballistic as production stagnated. Given that the current episode is a strong one and could match 1997 – 1998 El Nino, the impact on production will be more severe with Indonesia potentially experiencing a decline in production next year. Unlike the last two episodes, there will be little or no mitigating factor from an increase in oil palm hectarage since Indonesia’s new planting has been slowing in the past few years.

Perfect storm in 2H2016. While soybean supply is still healthy, rapeseed crop has already been hit. We believe a perfect storm is due in 2H2016 as La Nina weather follows El Nino closely and could bring drought to soybean areas. This could happen while palm oil production is suffering its sharpest yield decline due to the 12-month drought impact.

Raising estimates. We raise our CPO price assumptions for TDM to MYR2,700/tonne for FY16 (from MYR2,500) and MYR2,750 for FY17 (from MYR2,600). No change to our FY15 assumption of MYR2,200. With that, our earnings have been raised by 16-22% for FY16-17.

Maintain Neutral. We have upped our P/E target for TDM’s plantations division to 17x CY16 earnings (from 15x) to account for improving sentiment on plantation stocks on the back of the strengthening El Ninophenomenon. We note that during a rising CPO price environment, share prices tend to run ahead, pricing in peak valuations. TDM has traded in a historical P/E band of 5-35x over the last three years, and as such, we believe attributing 17x for its plantation division is fair. We maintain our 20x CY16 P/E target for its healthcare division. Our SOPbased TP is, therefore, raised to MYR0.68 (from MYR0.54). We highlight that every MYR100/tonne change in the price of CPO could affect TDM’searnings by 6-9%. We maintain our Neutral recommendation on the stock, as we believe current valuations are fair. We highlight a potential catalyst in the form of the listing of its healthcare division in 2016/2017, which could unlock value for TDM. However, we also highlight a risk that it may be excluded from the Shariah Index come Mid -Nov, as its interest income over revenue is above the allowable 5% mark, at 5.8%.