Highlights

• Our latest meet-up with the management has illuminated the developments of the company, since the offer by SATS to purchase a 49% stake in Brahim’s Airline Catering Hol dings (BACH) for a cash consideration of RM218m.

• Divestment Payment Schedule. To recap the RM218m offer is payable in 2 t ranches: (i) RM110m upon the completion of the transaction; and (ii) RM108m conditional upon certain financial targets being achieved.

• The second tranche of RM108m is variable and payable over a 3 year period, with a ceiling amount of RM30m plus add on of RM6m to be paid at the end of each financial year subject to meeting a PA T target. Shoul d Brahim’s not be able to achieve the agreed financial targets, the amount would be pro-rated based on the actual performance within a set range. (See Figure#2)

• Deleverage. As touted in our previous report, Brahim’s intends to pare off at least 50% or RM75m of thei r total debts (RM150m) with the fi rst tranche of payment to be received upon the completion of the transaction. This would generate an interest saving of RM5-6m per annum.

• Aviation catering. Management guided that meal volume in the month of September dropped by a significant 13% yoy, which correlates with the lesser passenger traffic statistics reported by MAHB for the same period. This decline is attributed to the lower international passenger traffic arising from the haze and to a greater extent, the ongoing restructuri ng of MAS’s flight routes . Management however expects meal volumes to stabilize 4Q15.

• Non-Aviation Catering. Brahim’s are in hot pursuit to grow their non-aviation catering segment. Contracts for MAHSA College and the Emirates Lounge at KLIA have been secured. Catering for other ai rline lounges as well as other segments in the corporate and public catering arena has also been touted as a possibility for FY16. Nonetheless, aviation catering still accounts for circa 90% of thei r revenue contributions.

Risks

•  Key risks in the near term include the ongoing haze that is stifling tourist numbers visiting Malaysia. The weak RM curtailing outbound tourism by Malaysians. In the medium to long term; risks include failure to effectively diversi fy away from aviation based catering.

Rating

The share price has run up by 67% from our report dated 14 Sept, where we highlighted a potential emergence of a strategic partner, as such with much of this play already priced in we downgrade our rating to a HOLD.

Valuation

• We altered our valuation from SOP to P/B in light of greater clarification of the divestment payment structure, the near term challenges of MAS’s consolidation and growth in the non-aviation catering segment will take time to fruit . We opine the stock is fully valued. Cut our TP to RM1.00 pegged to 1.0x P/B from RM1.25

Source: Hong Leong Investment Bank Research - 5 Nov 2015