Results

• Below Expectations: Brahim’s reported 1QFY15 core PATAMI of RM2.84m came in below expectations, accounting for 14.5% and 17.4% of ours and consensus estimates, respectively.

Deviations

• Lower-than-expected average selling price per meal.

Highlights

• Yoy: Revenue declined by 7.4% yoy during the quarter 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 fell further yoy, arising from price cutting implemented by MAS under its Recovery Plan, as well as the concessions agreed with MAS under the settle agreement.

• Qoq: Revenue grew by 8.4% yoy, of which we believe was due to higher number of meals served, which was more than sufficient to offset lower average selling prices.

• Operating profit improved further on the back of economies of scale and costs savings initiatives. Do note as well that there was a one-off payment to MAS on the settlement of dispute totaling RM94.03m with a global settlement of RM37.95m, which happened in 4QFY14.

• The management views the inflight catering segment to remain challenging for the remaining 9M of FY15 despite seeing improvement in passenger load in 2QFY15. Furthermore, margins are likely to be impacted from MAS’ turnaround plans due to revised pricing of its meals. Revenue from foreign airlines however is expected to improve marginally due to incoming new airline clients in FY15.

Risks

• Pandemic outbreaks.
• Termination of concession agreements.
• Relatively elastic demand.
• Catastrophic events on air-travels.

Forecasts

• We tweaked our forecasts lower, taking into account lower average costs per meal charged to MAS (25% discount in the interim agreement) before the new catering agreement is effective (Sept 2015). As such, FY15 and FY16 EPS are lowered by 16.3% and 8.2%, respectively.

Rating

BUY

Positives

• 1) Niche industry; 2) Sustainable earnings from long-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 economic conditions/pandemics; (2) Delay in the kitchen in Makkah; (3) Additional borrowings for any asset injections could increase net gearing significantly; (4) MAS’ restructuring plans resulted in downside risk to group’s catering business.

Valuation

• Target price remained lowered to RM1.12 based on FY15’s 15.0x P/E and 8.5x EV/EBITDA, an unchanged 20% discount to peers. Maintain BUY.

Source: Hong Leong Investment Bank Research - 29 May 2015