Highlights

• Rapid catering contract abound? According to The Edge Weekly, Brahim?s Airline Catering Holdings (BACH, a 51%- subsidiary of Brahim?s) is close to securing a catering contract with Petroliam Nasional Bhd?s Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor.
• The deal is purportedly for three meals a day for 10,000 pax at approximately RM12/meal. Based on our estimates, the deal (if it materialises) would boost Brahim?s revenue and PBT by 10% and 19% respectively, assuming a PBT margin of 15%. We also note that Brahim?s will pay minimal tax as it has approximately RM13m in tax credits which should offset most of its tax expenses.
• Kitchen rental waiver. Additionally, Brahim?s is also seeking a waiver for the bulk of rent for its kitchen for 2017-2018, estimated to cost RM20m/year. Should Brahim?s have the rent waived by the Ministry of Finance, BACH will save circa RM14m/year (after adjusting for minority interests).
• SATS incentive structure. Recall that as part of the divestment of a 49% stake in BACH to SATS, the deal included incentive payments for Brahim?s, in the event that BACH meets certain PATAMI thresholds.
• Currently, BACH is unlikely to reach the minimum required PATAMI for 2016 (RM23.7m) as BACH has recorded only RM1.7m PAT in 9M16.
• These two agreements would add RM23.2m to BACH?s bottom line in FY17. Excluding the Rapid catering contract, we forecast BACH to record approximately RM10m PAT in 2017 (BACH recorded RM2.24m in 3Q16 after adjusting for MAB?s 30% share). Including the Rapid contract, our FY17 PATAMI forecast for BACH would rise to RM33.3m, which would entitle Brahim?s to an incentive payment of RM13.6m at the end of FY17.
• Best-case scenario. Assuming Brahim?s secures both deals, we estimate the group?s FY17 PATAMI to be boosted by 117% to RM21.5m or 9.1 sen per share.

Risks

• Inability to capture new catering agreements.

Forecasts

• Unchanged, pending formal announcement of Rapid catering contract and kitchen facility rental waiver.

Rating

(TRADING BUY ↑, TP: RM0.98 ↑)

• Upgrade to TRADING BUY as we roll over our valuation to FY18 while expecting near-term news flow to provide share price excitement. Securing the Rapid catering contract and kitchen facility rental waiver would signal a rerating catalyst for the group. However, we maintain our earnings forecasts as we are unclear of the timing, let alone the materialisation of these 2 developments.

Valuation

• We upgrade our call to Trading Buy from Hold with higher TP of RM0.98 based on unchanged 16x FY18 PE. Our PE multiple of 16x represents a discount of 30% to SATS PE multiple of 22.5x

Source: Hong Leong Investment Bank Research - 20 Feb 2017