Highlights

Our latest meet-up with the management has further reaffirmed our positive view on Brahim’s. We have also gathered more information with regards to the future plans of the sugar refinery project in East Malaysia.

The shareholders of Admuda have discussed about the ongoing sugar refinery project and as such, Brahim’s have came up with two alternatives: 1) dispose its 60% to the promoters with no gain or losses; or 2) promoters to capitalize all the cost incurred during the pre-construction phase (land clearing, etc). As a result, Brahim’s 60% stake will be diluted from a subsidiary to an associate level.

The latter option seemed to be more favourable to Brahim’s but nothing is firm yet at this juncture. To note, Brahim’s have not paid any capex on the project besides the 20% deposit for the land acquisition of RM14m.

Brahim’s plans to expand its in-flight catering foothold internationally by acquiring stakes in other international airports. The group is currently in discussion with airports in China and is also planning to approach Aerofood Catering Service (ACS-Garuda Indonesia). We believe there is probability for the plans to materialize as Brahim’s holds a renowned Halal certification which is recognized worldwide.

Over to its existing business, Brahim’s catering operations were largely not impacted by the MH370 incident where it recorded consistent monthly meal productions from Jan-May ’14 of circa 1m meals/month.

Brahim’s also plans to negotiate with Host Marriott Services Corp. (HMSHost) to buy out the latter’s 49% stake in D-Host, which would enable Brahim’s to consolidate 100% of DHost’s earnings. Note that earnings from D-Host are currently equity accounted.

The losses from Café Barbera is expected to narrow to circa RM0.8m (vs. 2m loss in FY13) for FY14. The group also plans to acquire the Café Barbera outlet in Indonesia, which currently generates circa RM180k/month. Acquisition costs will be offset by the RM700k seed money injected in FY12.

Risks

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

Forecasts

Despite numerous plans and initiatives mentioned above, we are keeping our numbers for now. We will only be imputing these contributions as and when these initiatives solidify.

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. At current price of RM1.88, we continue to advice investors to buy on weakness.

Source: Hong Leong Investment Bank Research - 3 Jul 2014