Results

• Below Expectations: Brahim’s reported 1HFY16 core loss of RM10.8m. We deem this to be below our expectations as we had expected a smaller loss by 1HFY16 on the back of a recovery in air travel demand and the finalization of MAS’s flight route rationalization earlier this year.

Deviations

• Lower than expected meal off take from MAS affecting scalability.

Highlights

• YTD: Revenue declined by 20.2% mainly attributed to the catering segment which saw a lower average selling price/meal served to MAS as per the NCA, coupled with a decreased number of MAS’s flight vs SPLY on the back of the flight rationalization program impacting meal volumes in 1HFY16.

• Furthermore, the drag was also contributed by mixed performance across its business segments: logistics (+3.69%), and restaurant (-50.6%). Profits declined on the back of a tougher operating environment.

• Qoq: Revenues increased by 1.7%due to marginally better meal volume off.Net loss widened to RM6.6m (1Q16: - RM4.8m) due to a mix of losses from the holding company and catering division. In 1Q16, catering turned a small profit.

• Yoy: At the EBIT level, losses from aviation catering narrowed in 2Q16 to RM-2.27m vs 2Q15 of RM-4.98m. This is reflexive of the cost saving implementations and menu enhancement for economy class which commenced in May. Q3 earnings will reflect the menu enhancement from business class which commenced in July, whilst SATS scrutiny of their procurement process would also be better reflected in the coming quarters.

• Meal volumes: Management has guided that meal volumes for the month of July are encouraging, averaging circa 40 thousand meals per day. Furthermore, MAS has been on a promotions drive, which will augur well for meal volume in the 2HFY16. On that note, the 2HF of the financial year has historically reflected the bulk of Brahim’s earnings.

• Whilst we do believe that Brahim’s is on track for a recovery, we now expect a slightly longer gestation period before the company can take off again.

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

• We lower our FY16/17 earnings by 11%/13% to account for the lower meal volume expectations and lower margins on the back of loss of scale from their catering business.

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. We continue to see long term value in the stock but there are short term operational challenges that the group will face as its core customer continues to evolve.

Valuation

• We reduce our TP to RM1.08 (from RM1.32) based on 14x FY17 PE in view of the uninspiring results and longer gestation period. Our PE multiple of 14x represents a discount of 35% to SATS PE multiple of 21.5x.

Source: Hong Leong Investment Bank Research - 30 Aug 2016