· Share price bashed down. BRAHIM’s share price retreated 56% from a high of RM2.70 to low of RM1.19 after a series of disappointing financial results and amid the concern of MAS restructuring exercise. Financially, 9M14 core PATAMI fell 27% to RM10.6m on the back of lower revenue (3.9%) amounting to

RM274.5m. 9M14 net profit contribution from airlines catering segment (contributes 95% revenue) slumped 37.2% to RM34.5m, on the back of lower passenger volume following the recent air disasters as well as lower ASP/meal of MAS flights due to the cost reduction initiatives.

· Not the end of the world. Although MAS flights accounted for >70% of the total airlines meals sales of BRAHIM, we do not expect a complete slump even if MAS decides to cut down its flights significantly as the demand-driven flights to certain destination will eventually be taken over by the other airlines in KLIA, where BRAHIM has a commanding market share of 99%. However, margins are projected to be narrowed as contracts with other airlines offer lower margins as compared to MAS’.

· Diversifying away from airline catering. To recap, the Group has proposed to acquire Burger King (BK) Malaysia and Singapore franchise holder, Rancak Selera for a cash consideration of RM95m through 80:20 joint venture with Quantum Angel, headed by Dato Ahmad Zaki, the former Managing Director of KFC franchise. The Group is aiming to turn around the loss-making entities by leveraging on the Dato Ahmad Zaki’s expertise as well as through various marketing and product strategies. We conservatively expect the Group to take 2-3 years to turn around the business.

· Moving upstream. In another corporate exercise, BRAHIM has entered into a business joint venture (49:51) with Carpenter Beef Pty Ltd for the development of a Halal-compliant abattoir in Perth, Australia, which will incur a CAPEX of RM21.3m based on BRAHIM’s stake. The move will provide the Group better control and cost efficiencies of raw material (beef) for both its airlines catering needs as well as for the BK should the deal materialises.

· More balanced mix. We understand that the Group is aiming to reduce the dependency on the dominant airline catering business (95% revenue) to a more balanced mix of 50:50 with F&B business. Thus, we foresee the Group to seek for further acquisition opportunities in the F&B space moving forward. Gearing is expected to increase to 0.76x from 0.47x post BK and abattoir JV, but management still sees room to gear up at below the 1x level.

· Not Rated with FV of RM1.30, based on 19x PER FY15 EPS of 6.83 sen, in line with its 3-year mean PER. We laud the Group’s effort in focusing more on F&B business in order to reduce its exposure to the airlines catering business. However, we think that the contribution from BK will only arrive in a longer term considering the loss-making status it is in now. Meanwhile, higher finance costs will be incurred to fund the acquisitions as well as the CAPEX. We have yet to factor in the financial impact from the acquisitions before the deals are completed. At this juncture, the stock is fairly valued judging on the 7% earnings growth we project in FY15.

Source: Kenanga