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). Kulim remains a BUY with sum-of-parts TP raised to MYR3.74. With its age profile at its best ever, Kulim should eke out a single-digit production growth despite the dryness.

Unprecedented impact. We believe El Nino’s impact on edible oil supply will be its biggest ever, given its strength and the high global reliance on palm oil. In the last mild El Nino in 2009-2010, the palm oil price went ballistic as production stagnated. Given that the current episode is a strong one and could match the 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.

Age profile at its best ever. Kulim’s prime age trees make up 42% of its total planted area, its best ever and a numb er which has been rising. This should help drive a steady production growth under normal circumstances and help to cushion the drought impact in the current scenario.

Raising estimates. We raise our CPO price assumptions o 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 24.4% for FY16 and by 4.8% for FY17. Given its relatively high production cost and hence operating leverage, a MYR100/tonne change in CPO price will result in a 14% change in net profit.

Potential kicker from Mister Softee. Microsoft’s setting up of an operation in Sedenak, Johor, if it happens, could boost Kulim’s land value significantly. Kulim has two estates in the vicinity totaling 4,554 ha of land with average book value of MYR0.38 psf. Maintain BUY, with higher SOP-based TP of MYR3.74 (from MYR3.00).