Highlights

The Edge reported that Brahim’s is forming a partnership with All Nippon Airways (ANA) to provide in-flight halal meals for Middle Eastern airlines landing in Haneda and Narita airports in Japan.

Apart from in-flight catering, Brahim’s will also provide its ready-to-eat meals such as nasi lemak and cooking sauces to hotels operated by the airline.

Comments

This news is positive to the group as the partnership would not only allow Brahim’s to enter into the Japanese market but also penetrating into the Middle Eastern market. There are currently 15 Middle Eastern airlines that fly into Japan.

We understand that the group will be providing its expertise to transform ANA’s existing kitchens (Narita and Kawasaki Inflight Catering Factory) into halal-compliant. ANA is currently supplying in-flight meals through its subsidiary, ANA Catering Service Co. Ltd.

The collaboration will most likely be formed through a joint venture (JV) but there is no clear signal of percentage stakes yet. If there is a JV, we opined that Brahim’s would negotiate with ANA with hopes to gain meaningful stake in order to consolidate or equity account the JV.

With RM5m potential gross profit contribution to Brahim’s (as reported in The Edge), the group would experience an incremental of ~RM1.6m in operating profit, assuming similar gross and operating profit margin as its current catering business of 58.5% and 18.5% respectively.

As for the provision of ready-to-eat meals and cooking sauces, the group is looking forward to distribute them to hotels operated by the airline such as InterContinental, Crowne Plaza and Holiday Inn.

Risks

• Pandemic outbreaks.
• Slowdown in passenger movements.
• Termination of concession agreements.
• Relatively elastic demand.
• Appreciation of US$ and/or depreciation of RM.

Forecasts

Unchanged for now pending further confirmation on the partnership with ANA.

Rating

BUY

Positives – (1) Niche industry; and (2) Sustainable earnings from long-term concession agreements.

Negatives – (1) Earnings highly dependable on economic conditions/pandemics; (2) Delay in the opening of KLIA2 and sugar refinery plant in Sarawak; and (3) Additional borrowings for any asset injections could increase net gearing significantly.

Valuation

Maintain BUY with unchanged TP of RM2.13 based on average of 14.9x FY15’s EPS and 7.0x FY15’s EV/EBITDA.

Source: Hong Leong Investment Bank Research- 6 Jan 2014