Friday 29 Mar 2024
By
main news image

This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

brahim_trade-wise_mm12_tem1081_theedgemarkets

News of inflight caterer Brahim’s Holdings Bhd’s potential partnership with Singapore-based SATS Investments Pte Ltd has brightened the loss-making group’s prospects, giving its share price a massive boost last week. 

Last Thursday, Brahim’s announced that it had received an offer from SATS Investments to buy a 49% stake in its wholly-owned Brahim’s Airline Catering Holdings Sdn Bhd (BACH) for RM218 million cash. 

BACH controls Brahim’s Airline Catering Sdn Bhd (BAC), which provides catering services to Malaysia Airlines and 36 other airlines operating out of KL International Airport (KLIA). Brahim’s holds a 70% stake in BAC with the remaining 30% held by Malaysia Airlines Bhd (MAB).

Sources tell The Edge that the partnership with SATS would be positive for Brahim’s as it would not only enable it to have a wider reach in the inflight catering business globally, but also help it expand into the non-aviation catering business.

The partnership will ultimately have to be approved by Brahim’s shareholders at an EGM. The transaction is being targeted for completion by year end, one of the sources says.

SATS is an integrated food services company that provides catering for both the aviation and non-aviation industries. It is fully-owned by Singapore-listed SATS Ltd (SATSL), a catering and ground handling services group with a presence in 44 airports in 12 countries.

The group serves 76 million meals a year, of which 25 million go to Singapore Changi Airport.  The bulk of its revenue comes from Singapore, where it caters for 45 airlines.

Brahim’s, widely recognised as the world’s largest halal flight kitchen, served some 18 million meals at KLIA last year. 

“By partnering with SATS, Brahim’s can widen its global reach. Also, its new catering agreement with MAB (its biggest customer) allows BAC to venture into non-aviation catering, unlike before, which means it can do catering for railways, schools, offshore oil rigs and so on if it wants. SATS is already in the non-aviation catering business,  so through the partnership, there’s that synergy ... BAC doesn’t need to learn (the non-aviation business) by trial and error,” says a source familiar with the two companies.

SATSL made a net profit of S$195.7 million for the year ended March 31, 2015, up 8% from a year ago, while revenue fell 1.9% to S$1.75 billion. 

Meanwhile, BACH’s value-add to the partnership is its halal expertise. “When SATS bids for new catering contracts, Brahim’s can bring that halal element to the table, giving SATS a competitive edge,” the source adds.

Hong Leong Investment Bank Research (HLIB), in an Oct 23 report, maintains its “buy” call on Brahim’s as it believes the partnership will improve Brahim’s profitability moving forward and aid in reducing its gearing. It raised its target price for the stock by 48 sen to RM1.25.

Brahim’s stock was once a star performer, with a run-up that began in 2012 and peaked at RM2.697 in March 2014, before coming down again on a lack of catalysts, leading some analysts to stop their coverage of the company. 

The stock hit limit-up last Thursday after news of the potential partnership emerged. It closed 30 sen or 44.1% higher at 98 sen, on strong volume of 9.65 million shares. The next day, it climbed by another seven sen or 7.1% to RM1.05 on an over two-fold increase in volume.

“This corporate development has set a new benchmark in terms of valuations. Our new target price implies a price-to-book ratio of 1.25 times with the other businesses free. 

“We believe that Brahim’s will leverage SATS’ existing network, while simultaneously, SATS will be looking to utilise Brahim’s halal certifications and expertise.

“This could open up a world of possibilities to both players, such as, but not limited to, tendering for catering services for Middle Eastern airports and airlines, as well as non-aviation catering in the region. Our checks suggest SATS is currently most active in the Asia-Pacific region,” HLIB says in its report.

Brahim’s had debt of RM150 million as at June 30, 2015. “Assuming that Brahim’s will pare down its entire debt, this would bring it to a net cash company. Furthermore, this would imply an interest saving of about RM10 million a year,” it says. 

Nevertheless, it expects Brahim’s earnings to stay lacklustre in the coming quarters as the aviation industry remains challenging and MAB, from which it derives the bulk of its revenue, is still undergoing a restructuring and cutting costs.

In March, Brahim’s agreed to new terms with the national airline company, taking a 25% cut in final monthly bills,  ahead of a new catering deal being worked out. That new catering deal took effect on Sept 1 this year and under the new terms, profit margins will be affected, the group said.

Brahim’s posted a net loss of RM32 million in FY2014, after making a net profit of RM26.2 million in FY2013. In 1HFY2015, it registered a net loss of RM3.97 million. In the first half, its pre-tax profit from inflight catering and related services fell sharply to RM3.84 million from RM25.68 million in the same period a year ago.

Apart from inflight catering, it also has a food and beverage business, but this is still loss-making. Pre-tax loss however narrowed to RM450,000 in 1H2015 from RM786,000 a year ago under an ongoing turnaround plan.

According to a source, the aim is for BAC — if not Brahim’s — to return to the black by the year end. It may take longer for Brahim’s to get back to profitability as it still has interest costs to carry.

Brahim’s board is expected to appoint advisers and deliberate on the terms of SATS’ offer soon.

SATS plans to pay the RM218 million to Brahim’s in two portions — RM110 million upon completion of the transaction, while the remaining RM108 million is conditional upon certain financial targets being met. These are basically profitability targets, the source says.

It is understood that MAB is open to Brahim’s forming partnerships, and the airline is expected to be consulted in the exercise. 

If the divestment is approved by shareholders, Brahim’s will end up having a 51% stake in BACH — the same shareholding level it had several years ago. It was only in 2012 that it ended up owning 100% of the company after it bought the remaining 49% stake in BACH (then known as Brahim’s-LSG Sky Chefs Holdings Sdn Bhd) that it didn’t already own, from its partner for RM130 million.

According to HLIB’s calculations, SATS’ offer of RM218 million for the 49% stake in BACH implies that entire company is worth about RM445 million, and BAC, RM636 million.

Post divestment, Brahim’s effective stake in BAC will drop to 35.7% from 70%.

“Assuming the RM218 million cash is used to net off total debts of RM150 million, net cash balance would be RM68 million,” HLIB says.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share