Results

Above Expectations – Brahim’s reported 1HFY13 core PATAMI of RM8.1m came in significantly above expectations, accounting for 70% of our full year forecasts.

Deviations

Higher-than-expected passenger carried by MAS.

Better-than-expected traffic in KLIA & LCCT.

Highlights

Revenue growth of 119.4% in 1HFY13 was largely attributable to the 126.1% jump in in-flight catering revenue. Brahim’s Airline Catering’s (BAC) major customer, MAS experienced an increase in passenger movements by 22.4%. This is following MAS’ efforts in repositioning its routes after joining Oneworld.

1HFY13’s bottomline grew further with the help of margins expansion by 2.4ppts on the back of better economies of scale as well as better cost control and efficiency after gaining 100% control of Brahim’s Catering Holdings Bhd (BACH).

Our positive stance on the group was further fortified by the logistics division which continued to perform after returning to the black in 1QFY13. We expect the trend to continue and benefit the group in terms of earnings contribution rather than drag in previous years as well as normalizing its effective tax rate closer to the 25% statutory level.

On its restaurant business, we believe Brahim’s will take the initiative to mitigate further losses under its Café Barbera arm by closing/relocating its non-performing outlets. Furthermore, we understood that it intends to open more outlets in Indonesia which is more profitable and well-received.

Airport restaurants, Dewina Hosts (reported under shares of results of JCE) continued to perform well and we expect the trend to continue on the back of increasing traffic flow in KLIA and LCCT/KLIA2.

As for the group’s sugar venture, we continue to expect the operations to commence in mid-2015 and become another additional source of earnings drivers for the group apart from its current in-flight catering business.

Risks

1) Pandemic outbreaks; 2) Termination of concession agreements; 3) Relatively elastic demand; and 4) Appreciation of US$ currency.

Forecasts

We have significantly tweaked our earnings upwards by 44%, 31% and 21% for FY13-15 to better reflect higher passenger carried airport traffic, lower D&A and MI assumptions.

Rating

BUY

Positives – 1) Niche industry; 2) Sustainable earnings from long-term concession agreements; 3) Benefiting from rising air travel but unlike airlines, not impacted by high jet fuel and US$ costs; and 4) Additional boost from new sugar venture.

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

Post-earnings revision, we upgrade our TP from RM1.33 to RM1.56 based on industry average of 14.9x FY14’s EPS and 7.0x FY14’s EV/EBITDA. Note that our valuations have not factored the group’s sugar venture which will only start contributing in FY15. Maintain BUY.

Source:Hong Leong Investment Bank Research- 29 Aug 2013