Highlights

Brahim’s had entered a MoU with Dhyafa AlBalad AlAmeen Co Ltd (Dhyafad) to formalise their intention to collaborate and establish a JV company to develop food manufacturing, production and services in the city of Makkah, Saudi Arabia.

Comments

We are positive on the announced deal as it would further enhance Brahim’s status as a halal meal caterer, with potential of establishing a strong foothold in the Middle East.

We gathered that the JV company would be in charge of three business segments: (1) supplying halal meals to South East Asia’s pilgrims (circa 10m meals/year); (2) setting up a frozen meal factory to serve its local community; and (3) process and pack “korban” meat to be donated to third world countries.

Potential capex (construction of factory/kitchen) to be incurred for this venture ranges between US$40-45m with local (Saudi Arabia) borrowings while finance costs could go as low as 2% per annum.

The factory will be built on a 60-acre land located at the boundary outside of Makkah with construction period of 16 months. According to our channel checks, the land will be provided by the government.

The group expects profit from this venture to start contributing in FY15 as it will be delivering halal meals to Mekkah from Malaysia during the construction period of the factory (to complete by end-2015).

Our back-of-envelop calculations suggest that contribution from this venture will boost Brahim’s FY15 earnings significantly, potentially increasing PATAMI to RM37.4m (from RM33.0m or +12%), based on an assumption of 60:40 split between Brahim’s and Dhyafat respectively.

Risks

• Pandemic outbreaks
• Slowdown in passenger movements
• Termination of concession agreements
• Relatively elastic demand
• Appreciation of US$ and/or depreciation of R

Forecasts

Pricing in the potential contribution from the new business venture and the potential delay of the commencement of its sugar business to FY16, our FY15-16 EPS is raised by 8% and 19% respectively, based on an enlarged share base of 236.3m.

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

Post-earnings revision, we raise our TP to RM3.13 from RM2.90 based on higher P/E and EV/EBITDA multiple of 18x and 9x respectively, on par with peers’ average, for its international exposure. Maintain BUY.

Source: Hong Leong Investment Bank Research - 12 Mar 2014