Highlights

Brahim’s Holdings (BHB) core businesses have shifted to sustainable airport-centric food services from its ailing logistics business back. It provides proxy to the proliferation on air travel but without the baggage of ticket price war and jet fuel price fluctuations. Moreover, shareholders effectively have a free “cost-option” to its sugar venture.

The group continued its involvement in the F&B industry by more acquisitions throughout the years. With such initiatives, we believe BHB has the potential to record further growth going forward.

The bases of our investment highlights for BHB includes:

1) Full ownership of the airline catering business from FY13 onwards;

2) Further growth opportunities for its F&B outlets upon the opening of KLIA2 (expected by May 2014);

3) Venturing upstream into the only sugar refinery in East Malaysia (with lower raw sugar costs) which back to back agreement on raw and refined sugar, expected to be up and running by mid-2015; and

4) Potential injections of privately-owned F&B companies to enlarge earnings base and economies of scale.

Catalysts

• Stronger-than-expected passenger movements in KLIA and Penang airport.
• Higher-than-expected passenger traffic in KLIA2.
• Lower-than-expected market prices for raw sugar will further lower BHB’s costs, hence widening margin for its sugar refinery business.
• More privately-owned assets to be injected into BHB, especially businesses associated with F&B services.

Risks

• Pandemic outbreaks.
• Termination of concession agreements.
• Relatively elastic demand.
• Appreciation of US$ currency.

Forecasts

We are assuming MAS passenger movement to grow at ~15% in FY13 and ~5% in FY14-15, effective floor space to grow to 3,715.2 sq m and 4,617.4 sq m in FY14 and FY15 respectively, and its sugar business to start operating by mid-2015 with initial effective capacity of 75,000 mt pa.

Hence, BHB’s FY13-15 EPS is expected to grow at 25.1%, 24.1% and 42.5% respectively, or 3-year CAGR of 30.3%.

Rating

BUY (NEW)

Positives – (1) Niche industry; and (2) Sustainable earnings from long-term concession agreements.

Negatives – (1) Earnings highly dependable on economic conditions/pandemics; (2) Delay in the opening of KLIA2 and sugar refinery plant in Sarawak; and (3) Additional borrowings for any asset injections could increase net gearing significantly.

Valuation

Initiating with a BUY recommendation and TP of RM1.33 based the average of 13.6x FY14’s EPS and 7.1x FY14’s EV/EBITDA, both pegged to international average multiples.
As the sugar venture will only start contributing in FY15, we have not factored this into our valuation which implies that it is not reflected in share price at all.

Source: Hong Leong Investment Bank Research- 23 Jul 2013