Highlights

• We came away from our recent meeting with Brahim’s management feeling discouraged about the group’s near term earnings prospects given the lack of near-term revenue and earnings growth drivers.

• MAB contract remains Brahim’s bread and butter.

Brahim’s catering contract with Malaysia Airlines Berhad (at an estimated price of RM12.50/meal) remains the bread and butter for the group. While Brahim’s will benefit from MAB’s gradual rise in passenger volume, this will unlikely enhance Brahim’s overall profitability in the near term.

• Insignificant contribution from Qatar comeback.

Management guided that Qatar Airways has switched back to Brahim’s since Jul-17 (3 flights a day) with an estimated contract value of RM9m p.a. Given the small size of the contract (circa 3% of annual revenue), we see insignificant earnings impact arising from comeback of Qatar Airways. It is also unlikely to boost Brahim’s overall capacity utilization significantly.

• Efforts to boost kitchen utilization rate yet to bear fruit.

While Brahim’s is actively seeking other sizeable non-airline catering agreements in order to optimize its kitchen utilization and to diversify its revenue stream, we believe it would take a while before new contracts come to fruition.

Risks

• Inability to secure new catering agreements.

• Slower than expected turnaround of MAB

Forecasts

• We downgrade our FY17/18/19 forecasts by 39%/35%/35% respectively to account for less robust growth assumptions in the catering division as we had previously expected strong EBIT margin expansion from the new MAB contract in 3Q16 which has not materialised.

Rating

(HOLD , TP: RM0.56 )

• We downgrade to HOLD from Trading Buy due to the absence of immediate earnings growth catalyst. Meanwhile, the turnaround of MAB has largely-been priced-in, in our opinion.

• A re-rating in our earnings forecasts, TP and recommendation will only be warranted upon securing sizeable non-airline catering contracts.

Valuation

• Post earnings revision, we lower our TP on the stock (by 36%) to 56 sen , based on 16x revised FY18 EPS of 3.5 sen. Our ascribed PE multiple of 16x represents a discount of 30% to SATS PE multiple of 22.5x, reflecting concentration risk (as sales of meals to MAB accounts for the bulk of the group’s earnings). We downgrade our recommendation stock to HOLD (from Trading Buy) as valuation is no longer compelling post downward earnings adjustment.

Source: Hong Leong Investment Bank Research - 11 Jul 2017