Results

• Below Expectations: Brahim’s reported 1Q17 core net loss of RM1.9m which came in below our expectation, as we had expected the group to remain profitable.

Deviations

• Lower-than-expected passenger traffic from Malaysia Airlines (MAB).

Highlights

• Qoq: Despite relatively stable revenue, Brahim’s 1Q17 recorded a core net loss of RM1.9m (from PATAMI of RM1.6m in 4Q16). This was due mainly to weaker EBIT margin in the catering division (which declined to 3.3% from 7% in 4Q16), arising from lower MAB passenger volume (3.8m in 1Q17 vs 3.6m passengers in 4Q16). Meals served to MAB command a higher margin vs. other airlines).

• Yoy: Core net loss of RM1.9m narrowed from a loss of RM5m in 1Q16, due to higher EBIT at the catering division (which more than doubled to RM2.3m from RM1m in 1Q16) due to 1) Higher passenger traffic from MAB (which increased by 12.9% yoy); and 2) Higher meal prices (and hence better profitability) for new contract with MAB, which has commenced since 3Q16.

• Prospects: MAB’s growth in passenger numbers should bode well for Brahim’s going forward. We also expect the group to continue to diversify its revenue sources by securing further catering partnerships such as the recently secured UKM catering agreement.

• To recap, Brahim’s is currently in the midst of (1) Securing a Rapid Catering contract to supply labourers in Pengarang Johor for 10,000pax at approximately RM12/meal; and (2) Seeking a waiver for the bulk of the rent of its kitchen for 2017-2018. We note that these have yet to be reflected in our earnings forecasts and these would boost our FY17 net PATAMI forecast by 9.3m (or 3.9 sen/share), assuming Brahim’s secures both deals.

Risks

• Inability to capture new catering agreements.

• Inability to secure the two deals mentioned above.

Forecasts

• We reduce our FY17/18/19 forecasts by 5%/11%/11% respectively to reflect the uninspiring results.

Rating

• (TRADING BUY ↔ , TP: RM0.88 )

• Securing the Rapid catering contract and kitchen facility rental waiver will trigger a re-rating catalyst for Brahim’s. However, we maintain our earnings forecasts as we are unclear of the timing, let alone the materialisation of these two potential developments.

Valuation

• We maintain our Trading Buy rating with a lower TP of RM0.88 from RM0.98 based on unchanged 16x FY18 EPS of 5.5 sen. Our PE multiple of 16x represents a discount of 30% to SATS PE multiple of 22.5x

Source: Hong Leong Investment Bank Research - 24 May 2017