Results

Brahim’s reported 1QFY14 core PATAMI of RM4.2m accounts for 14.7% of HLIB’s full year earnings forecasts. For the past two years, 1Q usually accounts for at most 10% of full year earnings.

Deviations

We deemed this to be in-line due to seasonality (1Q is the weakest) and we are expecting much stronger performance for the remaining 3 quarters.

Highlights

Qoq: Revenue declined 15.2% largely due to seasonality as 1Q is the weakest quarter. However, we believe the decline was partially offset by additional revenue contribution from FOCA (foreign-owned commercial airlines) after the sign-up of 6 additional airlines in end-2013. Earnings were impacted further as margin narrowed on the back of lower operational efficiency (higher costs/unit).

Yoy: Revenue from MAS grew marginally at 1% vs. FOCA’s increase of 19%. The growth from MAS is attributable to the higher number of passengers carried (+20%), partially offset by lower ASP/meals (down trading from hot meals to cold meals for domestic flights).

FOCA’s steep growth on the other hand was due to the additional revenue from the newly-signed airlines. Earnings grew 58.3% yoy in the back of improved margins as operational efficiency increases (economies of scale).

We expected Brahim’s remaining 3 quarters to post stronger results due to:

1) Recent sign-up with Lufthansa and contribution of ~RM4m p.a. to kick-in in 2Q onwards;

2) AAX’s long-haul strategy to grow by ~40% in capacity for FY14, resulting in higher demands for in-flight meals;

3) Contribution from KLIA2 to start in 2Q; and

4) Significant interest savings (2Q onwards) from the group’s loan refinancing into Islamic loan, estimated about RM5m savings across 3 years.

Furthermore, Brahim’s is targeting to seal the deal with more foreign airlines. If successful, this would further boost the group’s revenue and earnings as FOCA generates higher ASP/meal and higher margins. It will also mitigate the potential earnings risk from MAS.

Risks

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

Forecasts

Unchanged.

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 yield compression, high jet fuel price 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 sugar refinery plant in Sarawak; and (3) Additional borrowings for any asset injections could increase net gearing significantly.

Valuation

TP reduced slightly to RM2.97 based on industry average of 16.9x FY15’s EPS and 8.7x FY15’s EV/EBITDA, as we realigns our valuations on par with peers (refer figure 3). Maintain BUY.

Source:Hong Leong Investment Bank Research- 29 May 2014