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 MYR2,650/tonne for FY17 (from MYR2,525). We raise our TP to MYR4.05 (from MYR3.30), implying 15% upside. We upgrade our recommendation to Buy (from Neutral), as we believe valuations are at more attractive levels now for this well-managed company with decent growth prospects.

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 IJMP to MYR2,390/tonne for FY3/16 (from MYR2,275), MYR2,650 for FY3/17 (from MYR2,525) and MYR2,750 for FY3/18 (from MYR2,600). With that, our earnings have been adjusted upwards by 6-12% for FY16-18.

Upgrade to Buy. We have also upped our P/E target for IJMP’s to 17x CY16 earnings (from 15x) to account for improving sentiment on plantation stocks on the back of the strengthening El Nino phenomenon. We note that during a rising CPO price environment, share prices tend to run ahead, pricing in peak valuations. IJMP has traded in a historical P/E band of 13-30x over the last three years, and as such, we believe attributing 17x for its plantation division is fair. Our TP is, therefore,raised to MYR4.05 (from MYR3.30). We highlight that every MYR100/tonne change in the price of CPO could affect IJMP’s earnings by 5-7%. We upgrade our recommendation on the stock to BUY (from Neutral), as valuations are now more attractive at current levels for this well-managed company with decent growth prospects.