Highlights

Major shareholder of MAS, Khazanah has offered to buyout the 30.63% shares owned by minority shareholders at RM0.27/share through selective capital reduction and repayment. The whole exercise will cost Khazanah a whopping RM1.4bn.

The privatization will allows Khazanah greater flexibility on restructuring of MAS, as well as provide an opportunity for minority shareholders to exit their investment in MAS, which is subject to risk of failure.

Comments

As the privatization exercise is positive to MAS in view of an expected internal re-structuring, we remain neutral on the announced proposal.

Should MAS decides to cut its capacity on its long-haul routes and concentrate on shorter regional and domestic networks, the impact faced by Brahim’s from long-haul routes cut could potentially almost be fully offset by the focus in regional and domestic routes.

The reason being that the group loads two sets of meals onboard domestic and regional flights within 2-3 hours flying time, similar to 2-3 sets of meals for long-haul routes.

Furthermore, we continue to believe that the cut in long-haul routes would be largely replaced by other airlines who are likely existing customer of Brahim’s. Besides MAS, Brahim’s also caters to 30+ other airlines flying out of KLIA. Also note that price/meal charged to foreign airlines is higher due to better food quality.

Having said that, we have analyzed several case scenarios on the impact to Brahim’s should MAS implements capacity cuts (10-30%) effective immediately.

Figure 1 showed the potential topline and bottomline contributions from all three scenarios, along with its expected target price (TP) following the capacity cut but without other airlines assuming the cut routes. FY14 would not experience a sharp plunge as compared to FY15 as we only impute the impact of one quarter vs. the whole year of FY15.

Risks

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

Forecasts

Forecasts remained unchanged for now as we will only impute the potential cut in capacity as it firms up.

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

Target price remained unchanged for now at RM2.29 based on FY15’s 13.5x P/E and 7x EV/EBITDA, a 20% discount to peers. Maintain BUY.

Source:Hong Leong Investment Bank Research- 11 Aug 2014