- IOI Corporation Bhd’s Loders Croklaan has agreed to subscribe to a 50% stake in LCK Nutrition Ltd for US$25mil (RM93.5mil). In return, Loders Croklaan will be transferring its Betapol business to LCK.

- The balance 50% of LCK Nutrition will be held by Kerry Group PLC, which is a food company incorporated in Ireland. Kerry Group is listed on the Ireland and London Stock Exchanges. It is not related to Wilmar International.

- According to the Bursa Announcement, Betapol is a palm oil-derived nutritional additive, which is used to fortify infant milk powder.

- Research results have shown that Betapol mimics the unique fat composition and structure of human milk fat. Betapol is said to have a positive physiological effect on brain function and physical development.

- The earnings potential of LCK was not disclosed in the Bursa Announcement. As such, we do not know if IOI’s investment is reasonably priced or earnings-enhancing.

- Financing the investment is not expected to be an issue for IOI. The group has gross cash and cash equivalents of RM1.8bil as at end-March 2015.

- We do not expect LCK to contribute significantly to IOI’s bottomline. The upstream business is expected to account for the bulk of IOI’s earnings. The plantation division accounted for 65% of IOI’s pre-tax profit in FY14.

- Manufacturing of specialty fats, which is undertaken by Loders Croklaan, is estimated to account for 40% of IOI’s manufacturing profits annually. This translates into an EBIT of RM304mil in FY14.

- We estimate the production capacity of Loders Croklaan at more than 650,000 tonnes annually. About 46% of the capacity is located in Netherlands while another 38% are located in USA. The balance 16% of the processing capacity is located in Malaysia.

- Maintain BUY on IOI Corporation.

Source: AmeSecurities Research - 24 Jun 2015