This article first appeared in The Edge Financial Daily, on May 10, 2016.

Brahim’s Holdings Bhd 
(May 9, 98.5 sen)
Upgrade to buy with a higher target price (TP) of RM1.32: We are of the opinion that the worst is over for Brahim’s Holdings Bhd after two years of losses and cloudy earnings prospects. 

The signing of the new catering agreement (NCA) and entrance of SATS Ltd have brightened the earnings and strategic outlook for Brahim’s.

Brahim’s bottom line is poised for a recovery in financial year 2016 (FY16) on the back of the recalibration post-divestment and several short- to mid-term catalysts for the company. As such, the stock warrants a rerating.

In the near term, the recovery in demand for air travel is a positive for Brahim’s due to the correlation between meal volumes and the increased demand for air travel. In the past two years, meal volumes have been on a downward trajectory due to sentiments regarding Malaysia Airlines Bhd and its rationalisation plan.

The recent stabilisation of the ringgit will also aid a recovery in air travel demand as purchasing power returns after a two-year hiatus.

Brahim’s is looking to venture into other business segments within the aviation services space apart from cabin handling. 

The next frontier that Brahim’s could potentially explore falls within the Gateway Solutions space, which includes airfreight, bagging, ramp handling, cargo, laundry services and passenger services.

The tie-up with 7-Eleven Malaysia represents a significant coup to Brahim’s in its foray to diversify away from aviation catering. The tie-up secures Brahim’s a channel with tremendous potential for scalability.

In the medium to long term, risks include failure to effectively diversify away from aviation-based catering and the purported synergies from the divestment of Brahim’s Airline Catering to SATS fail to fruit.

We adjust FY16 earnings by 123% to account for the turnaround in air travel demand and the normalisation of business for Brahim’s. We also introduce our FY17 forecast. 

We upgrade our call to “buy”. The emergence of SATS as a strategic partner has brightened prospects in providing an operational blueprint for the group. While growth in the non-aviation catering segment will take time to fruit, the recovery in airline passenger traffic and gradual ringgit appreciation, as well as cementing the NCA are near-term catalysts that moot the rerating.

We switch our valuation base from the price-to-book ratio to the price-earnings ratio (PER) to account for positive earnings expectations in FY16 and beyond.

Subsequently, our TP is raised to RM1.32 (from RM1) based on 15 times FY17 PER. Our PER  of 15 times represents a discount of 25% to SATS’ PER of 20 times. — Hong Leong Investment Bank Research, May 9