Highlights

• Brahim’s have announced that its 70%-owned subsidiary, Brahim’s Airline Catering Sdn Bhd (BAC), has entered into New Catering Agreements (NCAs) with Malaysia Airlines Bhd (MAB).

• The NCAs are in 2 separate contracts covering “Wide Body aircrafts” flights and “Narrow Body Aircrafts” flights and both shall commence on 1 Sept 2015, and shall remain in force for a period of 5 years with an additional 5 years renewal.

• Brahim’s will continue to undertake in-flight catering services and cabin handling services, as well as inventory storage and management services to MAB.

Comments

• We take the announcement positively as the signing of NCAs will now allow for a high degree of certainty in BACs business with MAS and later with MAB as its caterer in the nominated flights.

• The NCAs would also maintain BAC’s position as KLIA principal halal in-flight caterer to the remaining 36 international airlines and other potential new airlines calling on KLIA and PIA. We also understand that BAC will be having several more new customers coming in by 3QFY15.

• Pricing of the NCAs will be based on a competitive price methodology for meals and cabin handling, of which we believe is benchmarked to international standards.

• In terms of profitability, although there were no figures disclosed in the announcement, we believe Brahim’s would still be able to have satisfactory net margins although it would not be as high as compared to the pricing terms in the Old Catering Agreement (OCA).

• However, we believe that with the NCAs, BAC is now free to utilize the kitchen for any potential industrial catering plans should the kitchen has additional capacity to be utilized (after serving MAB and all other foreign airlines). Hence, there could be potentially new contributions to the group under its F&B segment.

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

BUY

Positives

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

Negatives

• (1) Earnings highly dependable on economic conditions/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. We are upgrading the stock to BUY given more certainties to the group’s operations post-signing of the NCAs.

Source: Hong Leong Investment Bank Research - 12 May 2015