Highlights

Brahim’s have officially announced that it has entered into a collaboration agreement with ANA Holdings Inc to produce halal Japanese cuisine for in-flight catering in Japan and to consider the establishment of a joint venture (JV) for a Halal flight kitchen in Narita and Haneda Airports, Tokyo, Japan.

Comments

We remain positive on the move where it will propel Brahim’s to another level with international exposures.

In our view, we opined that Brahim’s would take several months to “halal-ise” ANA’s flight kitchens (and no capex are needed. In the beginning stages, Brahim’s would assist in supplying some Muslim cooks given that every cook in a halal kitchen has to be Muslim.

Hence, we believe any additional earnings to come through from this partnership would kick in earliest by 2HFY14. Despite a marginal increase (1.8% to FY15’s operating profit, based on reported RM5m gross profit), this would improve Brahim’s branding worldwide, besides being the biggest Halal flight kitchen in the world.

Furthermore, the group not only captures international customers but also locals by marketing and distributing its ready-to-eat (RTE) products (by Dewina Food Industries, DFI) in Japan through its branch in Japan, brahim’s Food Japan Co. Ltd., with assistance from ANA Trading Co. Ltd.

However, any incremental earnings from the distribution of DRI’s RTE products would not be reflected in the accounts of Brahim’s listed entity as DFI is still currently privately owned by founder, Datuk Ibrahim. Brahim’s will only enjoy the earnings boost once DFI is injected into the listed entity, which we expect to materialize sometime this year.

Risks

(1) Pandemic outbreaks; (2) Slowdown in passenger movements; (3) Termination of concession agreements; (4) Relatively elastic demand and (5) Appreciation of US$ and/or depreciation of RM.

Forecasts

We upgraded our forecasts on MAS’ passenger carried and MAHB’s passenger movements in KLIA, LCCT and KLIA2. As such, FY14-15 EPS are increased by 3.5-3.7%.

Rating

BUY

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

Maintain BUY with with a higher TP of RM2.64 as we increased Brahim’s P/E and EV/EBITDA multiple to 16x and 8.5x respectively to better reflect its competency with regional peers (average 16.2x P/E & 8.6x EV/EBITDA).

Although Brahim’s share price has doubled since our initiation, we believe the group is still undervalued given its abundant projects / plans in the pipeline thus believing that Brahim’s warrant a higher valuation.

Source: Hong Leong Investment Bank Research - 8 Jan 2014