Results

• Below Expectations: Brahim’s reported 1HFY15 core PATAMI of RM4m losses which came in below expectations, not comparable to HLIB and consensus’ profit forecast.

Deviations

• Lower-than-expected sales and margin basically on all business segments.

Highlights

• In-flight catering: Revenue declined by 28% yoy in 2Q due to price suppression implemented by MAS under recovery plan as well as the concessions agreed with MAS under the Settlement Agreement.

• 3Q15 meals volume from MAS is expected to be consistent with 2Q15. However, profits margins from the activities may be affected due to the implementation of the new catering agreement effective from 1st Sept. Revenue from foreign airlines are expected to improve due to incoming new airline clients in 3Q15.

• Non-inflight catering: embarking into operating airport lounges commencing with Emirates Lounge and Malindo Lounge. It is also currently looking into operating café outlets at private universities and providing hot meals / refreshments on board the KTM Electronic Train System.

• Food and Beverage: Saw signs of positive turnaround as a result of its cost management plan.

• Logistics: Expected to continue its stable business trend in its warehousing services and forwarding business and is contributing positively.

• KLIA1: contract extended until 2018 and will continue to operate all outlets. It is expected to make minor refurbishment to the outlets before the end of this year.

• KLIA2: expects to show greater improvements. The most premium location in the Urban Food Court is expected to open by end of Sept and will definitely capture higher passengers.

Risks

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

Forecasts

• Unchanged pending meeting with management.

Rating

• Under Review

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

• Under review while maintain our TP at RM1.12 with downward biased based on FY15’s 15.0x P/E and 8.5x EV/EBITDA, an unchanged 20% discount to peers.

Source: Hong Leong Investment Bank Research - 28 Aug 2015