Results

• Above Expectations: Brahim’s reported FY14 core PATAMI of RM22.5m came in above expectations, accounting for 125.4% and 136.6% of ours and consensus estimates, respectively.

Deviations

• Lower-than-expected operational costs and effective tax rate.

Highlights

• Yoy: Revenue declined by 27.5% due to lower average selling price/meal served to MAS, line with the latter’s efforts to reduce unit cost of food services.

• Operating profit swung into the red mainly due to the concessions given to MAS under its Recovery Plan amounting to RM56.1m. Stripping it off, operating profit under the catering business would totaled RM14.6m (-38.7% yoy), attributable to the weaker sentiment post-MH370 and MH17.

• Qoq: Revenue declined by 11.8% due to lower average selling price on meals catered to MAS while operating loss was due the one-off item; partially offset by higher economies of scale on the back of higher volume of meals caters due to seasonality reasons.

• YTD: Topline dropped by 10.4% yoy, contributed by a mixture of growths and declines among its business segments: catering (-10.9%), logistics (+24.0%), insurance (- 6.9%), and restaurant (-12.1%). Profit declined further on the back of higher operating costs, delay in its opening of airport restaurants in KLIA and one-off expenses, partially offset by lower effective tax rate.

Risks

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

Forecasts

• We are keeping our forecasts unchanged despite the above expectations results as we continue to expect operational challenges to be faced by the group from MAS Recovery Plan as well upon the implementation of MAS Act in July. We see potential average price per meal to remain pressured.

Rating

HOLD

Positives

• 1) Niche industry; 2) Sustainable earnings fromlong-term concession agreements; and 3) Benefiting from rising air travel but unlike airlines, not impacted by yield compression, fluctuation in jet fuel price and US$ costs.

Negatives

• (1) Earnings highly dependable on economicconditions/pandemics; (2) Delay in the kitchen in Makkah; (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

Target price remained unchanged at RM1.43 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 - 2 Mar 2015