This article first appeared in The Edge Financial Daily, on October 22, 2015.

IJM Plantations Bhd 
(Oct 21, RM3.37)
Upgrade to buy from neutral with a higher target price of RM4.05 from RM3.30: 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 to 2010, the palm oil price went ballistic as production stagnated.

Given that the current episode is a strong one and could match the 1997/98 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 factors from an increase in oil palm hectarage since Indonesia’s new planting has been slowing in the past few years.

While soybean supply is still healthy, rapeseed crops have already been hit.

We believe a perfect storm is due in the second half of 2016 as the La Nina weather follows El Nino closely and could bring a drought to soybean areas.

This could happen while palm oil production is suffering its sharpest yield decline due to the 12-month drought impact.

We raise our crude palm oil price assumptions for IJM Plantations to RM2,390 per tonne from RM2,275 per tonne for financial year 2016 (FY16) ending March 31, RM2,650 from RM2,525 per tonne for FY17, and RM2,750 from RM2,600 for FY18.

With that, our earnings have been adjusted upwards by 6% to 12% for FY16 to FY18. — RHB Research, Oct 21