We believe the El Nino’s impact on edible oil supply will be one of the largest ever given its current strength. As such, we are raising our CPO price estimates to MYR2,725/tonne for FY17 (from MYR2,550). Maintain NEUTRAL with a SOP-based TP of MYR1.40 (9% upside). Despite the higher CPO prices, we believe Jaya Tiasa’s earnings will be held back by the still young age of its estates, which incur high production costs.

Unprecedented impact. We believe the 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 stronger 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.

Perfect storm in 2H16. While soybean supply is still healthy, rapeseed crop has already been hit. We believe a perfect storm is due in 2H16 as the La Nina weather follows the 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 lift our CPO price assumptions for Jaya Tiasa to MYR2,450/tonne for FY16 (Jun) (from MYR2,350), MYR2,725 for FY17 (from MYR2,550) and MYR2,750 for FY18 (from MYR2,600). With that, our earnings have been adjusted upwards by 7-16% for FY16F-18F.

Maintain NEUTRAL. With the earnings revision, our SOP-based TP for Jaya Tiasa has been raised to MYR1.40 (from MYR1.25). We maintain our target P/E of 15x 2016 for the plantations division, our DCF valuation for the log division, and a replacement value calculation for its plywood division. We highlight that every MYR100/tonne change in the price of CPO could affect Jaya Tiasa’s earnings by 6-8%. We maintain our NEUTRAL recommendation on the stock. Despite the positive impact of higher CPO prices, we believe its earnings will be held back by the still young age of its estates, which continue to incur high production costs. We expect a more significant turnaround for the plantation division to come in FY17-18.