Highlights

• Brahim’s announced that the group has entered into a business joint venture (JV) with Carpenter Beef Pty Ltd (CB) for the development of the Cataby Abattoir (CA) in Perth.

• CB supplies cattle to live export trade and domestic beef to Australia’s supermarkets, as well as supplying high and medium value beef to major Asian markets.

• CA is designed to meet all China, EU, USDA and Halal requirements and the plant is expected to be fully operational within 6-9 months with estimated capex of AU$15m or RM43.5m.

Comments

• We are positively surprised with the MoU announcement given that this would allow Brahim’s an additional avenue to obtain raw material consistently, of which we presume to be at a better pricing due to bulk purchasing.

• Despite Brahim’s having only 49% stake in the JV, Brahim’s would still be able to consolidate the financials of the JV as CB allows Brahim’s the majority control, leveraging on its Halal certification from JAKIM.

• According to the MoU, Brahim’s will be the major off taker for the products produced by CA and CB will be the responsible party to operate CA and overall program management of cattle as feedstock.

• We believe the JV would benefit Brahim’s through costs savings as well as enabling the group to have control on the quality of its raw materials. To note, the group consumes as much as 1 ton of beef weekly for its in-flight catering business.

• This would also allow Brahim’s to manage Burger King’s (BK) raw material costs more efficiently, as a part of BK’s turnaround plan. Beef is considered one of BK’s major raw material as its menu has an even split of 50:50 between beef and chicken. Note: Report on BK acquisition was issued on 27 Nov 2014.

• Net gearing-wise, Brahim’s portion of RM21.3m capex will increase the group’s net gearing ratio to 0.79x, including the RM76m share in the acquisition of BK.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD

Positives

• (1) Niche industry; (2) Sustainable earnings fromlong-term concession agreements; and (3) Developing into an integrated Halal food producer

Negatives

• (1) Earnings highly dependable on economicconditions/pandemics; and (2) Additional borrowings for any asset injections could increase net gearing significantly.

Valuation

• Target price remained unchanged for now at RM1.43 based on FY15’s 13.5x P/E and 7x EV/EBITDA, 20% discount to peers. We are also keeping our HOLD recommendation unchanged.

Source: Hong Leong Investment Bank Research - 3 Dec 2014