Highlights

• We met with management for an update on Brahim’s. The following are some key take away.

• We expect Brahim’s to continue reporting a loss in 2Q16 results on the back of lower than expected meal volumes from MAS. We note that 2Q16 is also affected by a slower month of Ramadhan.

• Airline Catering: With regards to MAS, its anchor customer, management guided that despite the flight route cull having been finalized end 2015- early 2016, MAS’s passenger loading has decayed yoy. Subsequently, we can anticipate revenue from meal volumes to be lower vs. 1HFY15. This would be the major drag on Brahim’s return to profitability at this juncture. On that note, Malindo air and Qatar airways are expected to return in 2H16.

• SATS synergy: Management guided that SATS has just completed a parallel study on co-procurement, thus in the near term we can expect a consolidation in procurement practices and other measures to reduce costs. However, it will take some time for such measures to take affect and reflect in the numbers.

• Non-aviation catering segment. Meals supplied to KTM have increased several folds since the pilot project started. Meal volumes supplied to 7E are also showing encouraging signs, increasing on a month on month basis, despite the slower month of Ramadhan in June. Notwithstanding these encouraging developments, contributions from its nonaviation catering segment are minute relative to its aviation catering segment.

• Whilst we do believe that Brahim’s is on track for a recovery, we do believe a slightly longer gestation period is needed before the company can take off again. On that note, the 2H of the financial year has historically reflected the bulk of Brahim’s earnings.

Risks

• In the near term, MAS’s inability to capture a higher loading factor would severely impact meal volumes. 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.

Forecasts

• Unchanged pending upcoming results.

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 gradual RM appreciation are near term catalysts that moot the re-rating.

Valuation

• We maintain our TP of RM1.32 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 - 17 Aug 2016