Highlights

We reviewed the potential impact to Brahim’s earnings arising from the possibility of MAS filing for bankruptcy and to be taken over by other operator(s) or to cease operations.

1) Restructuring & capacity cut: Assuming 30% cut in capacity (MAS travelers), Brahim’s bottomline could be hit by circa 22.5%.

However, these travelers may opt to travel with other airlines, which could be Brahim’s existing customers as Brahim’s also supplies in-flight meals to 30+ other airlines besides MAS.

Hence, the likely impact would be much less than 22.5%. Furthermore, the price/meal charged to foreign airlines is higher, largely due to higher quality of food in effort to remain competitive among other carriers and this has contributed to the faster growth vis-à-vis income from MAS.

Worst-case scenario, a 22.5% impact on earnings would reduce our target price to RM2.81 (still 42% upside to closing price of RM1.97).

2) Cease operations: We view this option to be unlikely and would result in termination of the 25-years concession agreement. Should this happen, MAS or the government would need to compensate Brahim’s at a rate of fair value plus 20% premium (as per agreement).

Based on Brahim’s payment of RM130m in Jan 13 for additional effective stake of 34.3%, the group will be paid about RM318m.

Although Brahim’s earnings would be impacted by the termination, we view this as temporary as the RM318m would enable Brahim’s to immediately inject the shareholder’s private assets which are already in operations. These injections would partially fill in the loss from MAS' contribution while the remaining would be from other airlines that could potentially replace MAS’ routes as well as potential M&As that Brahim's are currently on the lookout.

The collaboration with the Makkah government to supply food to pilgrims would commence contribution in FY16 and serve as another layer of “protection” to its earnings.

Risks

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

Forecasts

Unchanged.

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 unchanged TP of RM3.13 based on average of 18x and 9x P/E and EV/EBITDA respectively

Source: Hong Leong Investment Bank Research - 20 May 2014