Results

• Below Expectations: Brahim’s reported 9MFY14 core PATAMI of RM6.7m came in below expectations, accounting for 29.6% and 33.1% of ours and consensus estimates, respectively. However, we are expecting a very strong 4Q on the back of seasonality reasons as well as the absence of any catastrophic events.

Deviations

• Lower-than-expected contributions from in-flight catering and airport restaurants.
• Higher-than-expected effective tax rate.

Highlights

Yoy: Revenue declined by 10.4% due to lower average selling price/meal served to MAS ’s reduction in unit cost of food services to counter the declining passenger loads caused by MH17. Bottomline suffered further as operating costs increases (lower economies of scale), coupled wit h the delay in the opening of its airport restaurants in KLIA2.

Qoq: Revenue declined marginally by 2.9% due to lower ASP on meals catered to MAS as well while the lower bottomline was due margin compressions given lower economies of scale.

YTD: Topline dropped by 3.9% yoy, contributed by a mixture of growths and declines among its business segments: catering (-4.3%), logistics (+21.7%), insurance (+4.6%), and restaurant (-11.5%). 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 21.1%, 21.9% and 41.1% respectively, to reflect: 1) lower average selling price/meal; 2) margin compression; 3) lower contribution from airport restaurants; and 4) higher effective tax rate. Note that the large decline in FY16 earnings is largely due to the elimination of its sugar business, which the group is likely to dispose its stake back to Admuda’s promoters.

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 RM1.43 (from RM1.62) based on unchanged FY15’s 13.5x P/E and 7x EV/EBITDA, a 20% discount to peers. Maintain HOLD

Source: Hong Leong Investment Bank Research - 28 Nov 2014