Results

• Below Expectations: Brahim’s reported 9MFY16 core loss of RM12.61m. We deem this to be below our expectations as we had anticipated a quicker turnaround in profitability in the catering segment.

Deviations

• Slower turnaround in catering segment and inability to capture sufficient amount of airline partners.

Highlights

• Qoq: Revenue increased by 17% qoq from RM61.5m to RM72m and net loss narrowed from RM2. 5m to RM1.3m. This was due to catering showing an EBIT profit of RM3.1m this quarter due to meal enhancements from MAB, resulting in higher ASP.

• Yoy: Revenue increased 11% yoy while net loss narrowed from RM8.6m to RM1.3m due to reasons mentioned above.

• YTD: Revenue decline 11% from the catering segment which saw lower selling price/meal in the 1H16 served to MAS as per the NCA.

• Catering: Management has guided that meal volumes for the quarter were encouraging, exceeding 50,000 meals per day. Additionally, the group has also begun catering meals onboard for domestic and international Malindo Air flights.

• We believe Brahim’s catering segment will stay profitable in 4Q16 from higher demand during the school holiday period coupled with the menu enhancement from MAB. Furthermore, we expect meal volumes to increase in FY17 as MAS plans to launch 11 new routes between China and Malaysia beginning 2017.

Risks

• In the near term, MAB’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 earnings forecast downward to -RM10.2m from RM4.6m. FY17 earnings forecast is also cut by 49% to factor in slower than expected turnaround in the catering segment.

Rating

• (HOLD )

• We downgrade our Buy call to a HOLD . The emergence of SATS as a strategic partner has brightened prospects in providing an operational blueprint for the group. However, there are short term operational challenges that the group will face as its core customer continues to evolve.

Valuation

• We downgrade our Buy call to a Hold with a reduce TP of RM0.67 (from RM1.09) based on 16x FY17 PE in view of the uninspiring results and longer gestation period. Our PE multiple of 16x represents a discount of 30% to SATS PE multiple of 22.5x.

Source: Hong Leong Investment Bank Research - 23 Nov 2016