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 MYR2,725/tonne for FY17 (from MYR2,550). We raise our SOP-based TP to MYR4.80 (from MYR4.05), implying 9% upside. No change to our Neutral recommendation, as we believe valuations are fair, while there is a risk that it may not be reinstated into the Shariah index soon given its high dividend income over PBT ratio.

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 IOIC to MYR2,450/tonne for FY16 (from MYR2350), MYR2,725 for FY17 (from MYR2,550) and MYR2,750 for FY18 (from MYR2,600). With that, our earnings have been adjusted upwards by 6-10% for FY16-18.

Maintain Neutral. We have upped our P/E target for IOIC’s plantations division to 19x CY16 earnings (from 17x) 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. IOIC has traded in a historical P/E band of 15-25x over the last five years, and as such, we believe attributing 19x for its plantation division is fair. We maintain our target P/E of 12x for its manufacturing division. Our SOPbased TP is raised to MYR4.80 (from MYR4.05), after imputing RHB’s latest TP for associate Bumitama Agri (BAL SP, Buy) of SGD 1.42. We highlight that every MYR100/tonne change in CPO price could affect IOIC’s earnings by 3-5%. We maintain our Neutral recommendation on the stock. Catalysts to look out for include its reinstatement into the Shariah Index, which we believe may not happen in the near future, as its dividend income is 6.7% of PBT, above the allowable 5% mark.