Highlights

Malaysian Airliens MH17 has been reported to have crashed in the war-torn Russian-Ukraine border, with 295 people on board.

It is believed to have been shot down by a missile and all 280 passengers and 15 crew members on board are dead. The crash comes 4 months and 10 days after MH370 went missing.

Comments

We were taken by surprised on the reported incident above and are now concerned on the potential further weakening in market sentiment due to this.

Over on the MH370 incident, Brahim’s has weathered well and the negative impact has been insignificant. Total numbers of meals produced by Brahim’s post-MH370 have proven to be resilient at an average of circa 1m meals/ month.

However, we view that the potential negative impact from MH17 may give rise to uncertainty in passenger numbers and hence may result in a slowdown in total in-flight meals produced given the catastrophe is more widespread as compared to MH370.

Furthermore, given two back-to-back air travel incidents, we expect knee-jerk effect on sentiment will be affected.

Despite the short-term headwinds, we remain confident on Brahim’s long-term fundamentals and believe the group’s ability to meet our forecasts. However, we are turning cautious on investor’s perceptions towards Brahim’s over the near-to-medium term.

Risks

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

Forecasts

Earnings remained unchanged. However, total number of passengers carried by MAS going forward will be reviewed.

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

Given the expected weakening in market sentiment going forward, we cut our target price on Brahim’s to RM2.29 (from RM2.97) based on FY15’s 13.5x P/E and 7x EV/EBITDA, as we reduce our P/E and EV/EBITDA multiple to 20% discount to peers. Maintain BUY.

Source: Hong Leong Investment Bank Research - 18 Jul 2014