Results

Brahim’s reported 1HFY14 core PATAMI of RM5.7m came in below expectations, accounting for 20.4% and 21.6% of ours and consensus estimates, respectively.

Deviations

• Lower-than-expected operating profit margins.
• Higher-than-expected effective tax rate.

Dividends

None.

Highlights

Yoy: Revenue declined by 6.6% due to lower average selling price/meal served to MAS passengers as the airline downgrades meal options for its domestic and certain regional flights (i.e. from warm meals to cold meals). Bottomline suffered further as operating costs increases (lower economies of scale), coupled with the delay in the opening of its airport restaurants in KLIA2.

Qoq: Revenue was rather flattish qoq but bottomline was impacted by margin compressions given lower economies of scale.

YTD: Topline dropped slightly by 0.5% yoy, contributed by a mixture of growths and declines among its business segments: catering (-0.8%), logistics (+21.9%), insurance (+11.8%), and restaurant (-11.7%). Profit declined further on the back of higher operating costs, delay in its opening of airport restaurants in KLIA, higher tax rate and higher minority interest.

Risks

• Pandemic outbreaks
• Termination of concession agreements
• Relatively elastic demand
• Appreciation of US$ currency

Forecasts

We slashed Brahim’s FY14-16 earnings forecasts by 20-30% to reflect: 1) lower average selling price/meal; 2) margin compression; and 3) higher effective tax rate.

Rating

HOLD

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 KLIA2 and sugar refinery plant in Sarawak; (3) Additional borrowings for any asset injections could increase net gearing significantly; (4) MAS’ restructuring plans could potentially bring downside risk to group’s catering business.

Valuation

Post earnings revision, we cut our target price to RM1.62 based on unchanged FY15’s 13.5x P/E and 7x EV/EBITDA, a 20% discount to peers.

We also downgrade the stock from BUY to HOLD given the weak sentiment arising from the incident of MH370 and MH17 as well as MAS restructuring.

Source: Hong Leong Investment Bank Research - 27 Aug 2014