Brahim’s Holdings Bhd
(Jan 8, RM1.33)
Not rated, but with a target price (TP) of RM1.33: Brahim’s share price retreated 56% from a high of RM2.70 to a low of RM1.19 after a series of disappointing financial results and amid the concern of Malaysian Airline System Bhd (MAS) restructuring exercise.

Financially, nine months of financial year 2014 (9MFY14) core profit after tax and minority interests (Patami) fell 27% to RM10.6 million on the back of lower revenue (3.9%) amounting to RM274.5 million.

The 9MFY14 net profit contribution from the airline catering segment (contributes 95% of revenue) slumped 37.2% to RM34.5 million, on the back of lower passenger volume following the recent air disasters as well as lower average selling price per meal of MAS flights due to the cost reduction initiatives.

Although MAS flights accounted for more than 70% of the total airline 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 destinations 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 compared with MAS.

To recap, the group has proposed to acquire Burger King (BK) Malaysia and Singapore franchise holder, Rancak Selera Sdn Bhd for a cash consideration of RM95 million through 80:20 joint venture with Quantum Angel Sdn Bhd, headed by Datuk Ahmad Zaki Zahid, the former managing director of KFC Holdings (M) Bhd.

The group is aiming to turn around the loss-making entities by leveraging Ahmad Zaki’s expertise as well as through various marketing and product strategies. We conservatively expect the group to take two to three years to turn around the business.

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 capital expenditure (capex) of RM21.3 million 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.

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 food and beverage (F&B) business. Thus, we foresee the group will seek further acquisition opportunities in the F&B space moving forward. 

Gearing is expected to increase to 0.76 times from 0.47 times post BK and abattoir JV, but management still sees room to gear up at below the one time level.

We do not rate Brahim’s, but we believe that it has a fair value of RM1.30, based on 19 times price-earnings ratio (PER) FY15 earnings per share of 6.83 sen, in line with its three-year mean PER. 

We laud the group’s effort in focusing more on F&B business in order to reduce its exposure to the airline catering business. 

However, we think that the contribution from BK will only arrive in the 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 by the 7% earnings growth we project in FY15. — Kenanga Research, Jan 8, 2015.

This article first appeared in The Edge Financial Daily, on January 9, 2015.