Vol. 2: Riding the Waves of El Niño

El Nino's weather phenomenon has a major impact on world commodity prices. According to a 2016 publication by the International Monetary Fund (IMF), higher temperatures and droughts occurring particularly in Asia and the Pacific had raised soft commodity price by about 5.5% yoy during El Nino 2015 - 2016.

Based on the same report by IMF, El Nino generally, though not always, have an inflationary effect that varies from 0.1 to 1 percentage point. India, Indonesia, and Thailand experienced the biggest inflation increases in Asia, likely because of the high percentage of food in their respective CPI baskets at 47.6%, 32.7% and 33.5%.

In short, the El Nino effect could cause a domino of drought, crop failure, disrupting supply, increasing prices, and increasing cost of production for several companies especially within the consumer and poultry sector.

For example, wheat comprises 21% and 15% of ICBP and MYOR' COGS, respectively. As a result, based on the sensitivity analysis we calculated, an increase of wheat price by 5% - 10% will negatively impact ICBP's earnings by 3.6% - 7.2% from our base line target. Similarly, our sensitivity analysis suggests for MYOR that for every increase in wheat price by 5% - 10%, earnings will decrease by 5.2% - 10.4% from our base line target.

Source: ICBP, MYOR, Sucor Research

In addition, for JPFA, corn comprises 11.6% and soybean 6.2% of total cost. Thus our sensitivity analysis shows that for a 5% - 10% increase in corn price, JPFA's earnings will decrease by 15.3% - 30.6% from our base line target.

Source: JPFA, Sucor Research

With this in mind, do you think the potential for El Nino has been priced in yet with the current market price of the issuers above?

Well, consider this: Both ICBP and MYOR would still beat last year's earnings even if El Nino does lift those soft commodity prices, and downside is limited since the stocks still trade at an attractive valuation.

Enough reasons to start collecting those names, I guess?