09/07/2012 (The Star) - OSK Investment Research is upgrading the plantation sector to Overweight on expectation of palm oil price entering a new three-year price upcycle, fuelled by increasing probability of a drought-inducing El Nino weather phenomenon.

It said on Monday it believed Malaysia's already weak production might be aggravated by the onset of El Nino.

"We fear that this upcoming El Nino could be a severe one given that the last region-wide El Nino occurred from 1997 to 1998. We are upgrading KL Kepong, Astra Agro Lestari and Glenealy to Buys, and upgrade IOI Corp from Sell to Neutral," it said.

OSK Research now has Buy calls across the board, with the exception of IOI Corp. Its fair values are mainly pegged to a 16 times CY13 PE.

"There is room for further an upward revision as the sector re-rates, bearing in mind that the sector used to trade in excess of 20 times PE," it said.

The research house said it was raising its average crude palm oil price assumption for CY13 to RM3,500 per tonne, representing a 12.9% increase from its earlier assumption of RM3,100.

Compared with the CY12 average of RM3,215 year-to-date, OSK Research said the RM3,500 represented an 8.9% increase, which was consistent in 2006.

"However, unlike both the previous episodes, we believe the impact of El Nino will be immediate in the current scenario given that the trees in Malaysia are already experiencing stress due to dry weather in the past two to three months," it said.