Highlights/ Comments

• We are of the opinion that the worst is over for Brahim’s after two years of losses and cloudy earnings prospects. The signing of the ‘New Catering Agreement’ (NCA) and entrance of SATS have brightened the earnings and strategic outlook for Brahim’s.

• Brahim’s bottom-line is poised for a recovery in FY16 on the back of the recalibration post divestment and several short-to mid-term catalysts for the company. As such, the stock warrants a re-rating.

• In the near term, the recovery in demand for air travel is a positive for Brahim’s due to the correlation between meal volumes and the increased demand for air travel. In the past 2 years, meal volumes have been on a downward trajectory due to sentiments regarding MAS and its rationalization plan.

• The recent stabilization of RM will also aid a recovery in air travel demand as purchasing power returns after a two year hiatus.

• Brahim’s is looking to venture into other business segments within the aviation services space apart from cabin handling. The next frontier that Brahim’s could potentially explore falls within the ‘Gateway Solutions’ space, which includes: airfreight, bagging, ramp handling, cargo, laundry services and passenger services.

• The tie up with 7-Eleven Malaysia (7EM), represents a significant coup to Brahim’s in its forays to diversify away from aviation catering. The tie-up secures Brahim’s a channel with tremendous potential for scalability.

Risks

• In the medium to long term; risks include failure to effectively diversify away from aviation-based catering and the purported synergies from the divestment of BAC to SATS fail to fruit. Another aviation tragedy for any Malaysian carrier would impact passenger movements and sentiments towards flying with our carrier, thus decimating meal volumes.

Forecasts

• We adjust FY16 earnings by +123% to account for the turnaround in air travel demand and normalization of business for Brahim’s. We also introduce our FY17 forecast.

Rating

BUY

• We upgrade our call to BUY. The emergence of SATS as a strategic partner has brightened prospects in providing an operational blueprint for the group. Whilst growth in the nonaviation catering segment will take time to fruit , the recovery in airline passenger traffic and gradual RM appreciation, as well as cementing the NCA are near term catalysts that moot the re-rating.

Valuation

• We switch our valuation base from P/B to P/E to account for the positive earnings expectations in FY16 and beyond. Subsequently, our TP is raised to RM1.32 (from RM1.00) based on 15x FY17 PE. Our PE multiple of 15x represents a discount of 25% to SATS PE multiple of 20x.

Source: Hong Leong Investment Bank Research - 9 May 2016