Results

• Within Expectations: Brahim’s reported 1Q16 core loss of RM5.0m. We deem this to be within with our expectations as we expect on a full year basis the loss would be reversed on the back of a recovery in air travel demand, the finalization of MAS’s flight route rationalization and interest savings of up to 50% yoy.

Deviations

• Historically, the first quarter is seasonally the weakest quarter in the year. We expect improved performance for the remaining 3 quarters.

Highlights

• Yoy: Revenue declined by 29.5% due to lower average selling price/meal served to MAS under the NCA, as well as the consolidation of MAS’s flight routes throughout FY15 also had an impact on meal volumes in 1Q16.

• Furthermore, the drag was also contributed by contributed by mixed performance across its business segments: catering (- 30.1%), logistics (+2.29%), and restaurant (-52.1%). Profits declined on the back business restructuring and a soft operating environment.

• We remain upbeat of the prospects in FY16 on the back of a protracted resurgence in air travel especially from the local outbound tourists on the back of stabilization in RM.

• Whilst revenue from MAB are expected to drop yoy due to the overall flight route rationalization, it is expected to be partly mitigated by the recent commitment by MAB to enhance their economy class meals by circa 20% and from the increase in foreign carriers. MAB’s code sharing program with Emirates will increase contributions from FOCA airlines which command higher margins.

• Non-aviation catering segment is also expected to pick up during the rest of the quarters as exemplified by the tie up with 7-11 as well as KTMB. To note Brahim’s capacity utilization is circa 60%.

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

• Unchanged.

Rating

• We maintain our BUY call. 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 stabilization in RM, as well as cementing the NCA are near term catalysts that moot the rerating.

Valuation

• We maintain our TP of 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 - 27 May 2016