Highlights

• MAB turnaround: Malaysia Airlines Bhd's load factor rose to 90% in Dec-16, bringing 4Q16 figure to 82%. Additionally, MAB plan to launch 11 new routes to China in 2017. The gradual turnaround in MAB’s fortunes bodes well for Brahim’s as MAB remains a key contributor of the group.
• Brahim’s has begun catering meals to Malindo Air, a contract expected to be worth RM15m/year in revenue.
• Meal volumes: Management guided Brahims currently caters upwards of 55,000 meals a day.
• Brahim’s catering arm continues to look for catering contracts aside from airlines as part of their plan to diversify away from airlines as their main source of revenue.
• SATS tie up: Brahim’s have guided that the tie up with SATS have yielded significant synergies to the group. Namely: 1) SATS have assisted Brahim’s in the negotiation of higher cost structures with foreign airlines; 2) SATS expertise assisted in the passing of a gluten test on meals imposed by British Airways; and 3) Joint procurement efforts between SATS and Brahim’s are ongoing.
• SATS agreement: To recap, as part of the agreement with SATS, Brahim’s stands to receive an additional RM30m cash incentive should its catering arm (BAC) record RM7.5m PATAMI in 2016. However, BAC’s 9M16 recorded EBIT of RM1.8m make it unlikely the group will reach the stipulated RM7.5m hurdle. Brahim’s had booked ~RM7m in 1Q16 in anticipation for the incentive payment, but should Brahim’s fail to achieve RM7.5m PATAMI by FY16 end, the group will write off the booked RM7m.

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.

Forecasts

• Unchanged

Rating

(HOLD ↔, TP: RM0.67)

• Maintain 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 maintain our Hold call with an unchanged TP of RM0.67 based on 16x FY17 PE. Our PE multiple of 16x represents a discount of 30% to SATS PE multiple of 22.5x.
• MAB’s potential turnaround or the genesis of a major catering agreement in the future could signal a rerating for the group.

Source: Hong Leong Investment Bank Research - 31 Jan 2017