Highlights

Despite the recent selldown on Brahim’s share price due to weak market sentiment and concerns about impact from MAS on earnings, we remain positive about the group’s longterm growth as fundamentals are still solid.

Concern on MAS: As written in our previous report (refer report dated 20 May 2014, “What IF MAS Goes Bankrupt?”), Brahim’s would be impacted at most by -22.5% assuming MAS cuts its capacity by 30%. However, we view this as unlikely given that travelers would opt for other airlines, which are likely Brahim’s existing customers.

In the worst case scenario, a 22.5% drop earnings would reduce our target price to RM2.19 which still implies a 36% upside to yesterday’s closing price of RM1.60.

Concern on sugar venture: Despite MSM’s announcement on its JV with Al Khaleej International Ltd in building a plant in Tanjung Pelepas, Johor, we gathered that Brahim’s sugar venture in East Malaysia is still intact. At this juncture, we opined that it is still in the early days to determine whether Brahim’s would be disadvantaged by the new venture.

However, the construction of the refinery plant in Demak Laut, Sarawak is still in-going, where it has just completed its earthworks. To note, our current valuations and TP have not included the contribution from the venture as it will only kick in in FY16.

Fundamentals: We remain confident with Brahim’s existing operations and expects its full year results to be in-line with our forecasts of RM28.4m in PATAMI (+7.8% yoy), largely boosted by larger customer base (FOCA), opening of KLIA2 and interest savings from loan refinancing.

Going forward, its venture in Makkah will start to contribute significantly in FY15-16 of circa RM4m and RM7-8m respectively. Do note that the kitchen is expected to only complete and commence operations in FY16 and the contributions in FY15 are from the shipping of its currently ready-to-eat products to Makkah.

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 RM2.97 based on average of 16.9x and 8.7x P/E and EV/EBITDA respectively.

Given that share price have plunged by >30% in the past 2 months, we noticed an imminent reversal signal as indicated by technical oscillators. Hence, we advise investors to buy on weakness.

Source: Hong Leong Investment Bank Research - 10 Jun 2014