News

• Brahim’s Holdings Bhd has announced that they have received a conditional binding offer from SATS Investments Pte Ltd to acquire a 49% stake of the total issued and fully paid up ordinary shares in Brahim’s Airline Catering Holdings (BACH) for a cash consideration of RM218m. Subject to approval by the board, the RM218m is payable in 2 tranches:

• 1) RM110m upon the completion of the transaction.

• 2) RM108m conditional upon certain financial targets being achieved. Comments

• What we think: We are positive on this news as the link up with SATS provides Brahim’s with various opportunities to improve profitability moving forward as well as setting a new benchmark valuation for the catering business and aiding in reducing gearing. SATS is an integrated food services company, its operations consists of both aviation and nonaviation food services.

• Potential Synergy: We believe that Brahim’s will leverage on SATS existing network, whilst simultaneously, SATS will be looking to utilize Brahim’s Halal certifications and expertise. This could open up a world of possibilities to both players such as but not limited to, tendering for catering services for Middle Eastern airports and airlines, as well as non-aviation catering in the region. Our checks suggest currently SATS is most active in the Asia Pacific region.

• De-levering: Assuming that Brahim’s Holdings will pare down its entire debt which stands at RM150m in 2Q15, this would bring it to a net cash company. Furthermore, this would imply an interest saving of circa~ RM10m per annum.

• Value of Halal: We opine that this corporate development has also set the precedence in terms of valuing Brahim’s halal expertise and know-how in the catering business.

• Earnings: Earnings would still be lackluster in the coming quarters due to the challenging environment of the aviation industry as a whole. Furthermore MAS, the anchor customer is undergoing restructuring. However, SATS’s entry into the picture has brightened the prospects.

Risks

• Slowdown in passenger movements
• Termination of concession agreements
• Relatively elastic demand

Forecasts

• Unchanged pending further guidance by management.

Rating

BUY

Positives

• (1) Niche industry; and (2) Halal certificate.

Negatives

• (1) Earnings highly dependable on economic conditions/pandemics; (2) Delay in Makkah venture; and (3) Additional borrowings for any asset injections could increase net gearing significantly.

Valuation

• We maintain our BUY call with an upgraded TP of RM1.28 (based on the catering business alone) from RM0.77. This corporate development has set a new benchmark in terms of valuations. Our new TP implies a P/B ratio of 1.25x with the other businesses free.

Source: Hong Leong Investment Bank Research - 23 Oct 2015