Brahim’s to buy The Chicken Rice Shop?

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INFLIGHT caterer Brahim’s Holdings Bhd, whose shares took a beating last week after it agreed to less rosy interim terms with its biggest customer Malaysia Airlines (MAS), is about to jump into another food and beverage (F&B) venture in a bid to reduce its dependency on the catering business.

Sources say Brahim’s (fundamental: 0.35; valuation: 1.2) is in talks to acquire a local F&B business, TCRS Restaurants Sdn Bhd — the owner and operator of The Chicken Rice Shop, Sweet Chat and Dubu-Dubu in Malaysia. TCRS is also the co-owner of Pancake House International.

Details of the plan, such as pricing, remained sketchy as at last Friday as the two parties have yet to reach a deal. “Brahim’s is likely to acquire a stake in TCRS, not all of it,” a source tells The Edge.

Brahim’s shares, which fell 37.4% over the first four days of last week to hit a 22-month low of 82 sen on Thursday, rose to 86 sen on Friday morning before the company asked for the shares to be suspended until March 9, pending “a material announcement”.

The announcement relates to Brahim’s being in talks with “a local restaurant chain”,  another source says.

A search with the Companies Commission of Malaysia (CCM) shows that homegrown TCRS has consistently grown profits over the last three years. Its net profit grew almost fivefold in the financial year ended Dec 31, 2013 (FY2013), from three years ago. It turned in a net profit of RM1.64 million on the back of RM93.53 million in revenue in FY2013 compared with RM333,981 and RM59.72 million respectively in FY2010.

TCRS CEO Wong Kah Lin is listed as a shareholder with a 25.13% stake in the company while the remaining 74.87% is held by a Khoo Cheng Gaik. Wong’s mother, Gaik Wong, founded the company.

Brahim’s executive chairman Datuk Seri Ibrahim Ahmad, who has 50% equity interest in the company, could not immediately be reached for comment.

Barely two weeks ago, Brahim’s shareholders shot down a plan it had proposed in November 2014 to acquire the Burger King franchise in Malaysia and Singapore from Ekuiti Nasional Bhd for RM95 million.

At an EGM on Feb 25, 90% of the shareholders — through a show of hands — voted against the move, with some citing concerns that the company was buying a loss-making fast-food chain.

The aborted acquisition may have been a blessing in disguise, considering that Brahim’s would have had to plough sizeable investments into the chain at a time it faces bleak earnings prospects.

As it is, Brahim’s F&B business is loss-making, although it did manage to narrow the loss to RM1.56 million last year from RM2.27 million in 2013. It has a 51% stake in Dewina-Host (M) Sdn Bhd that runs food courts at the local airports and outlets such as Italian café chain Cafe Barbera.

Brahim’s potential acquisition of TCRS comes at a time its inflight catering prospects are looking dim with profit margins expected to deteriorate further as it negotiates a new contract with MAS.

Brahim’s 70% subsidiary, Brahim’s Airline Catering Sdn Bhd (BAC), has an exclusive 25-year inflight catering contract with MAS that ends in 2028. But as part of a major cost-cutting plan to help MAS return to the black, the airline is renegotiating terms with BAC with a new catering agreement expected to be inked by March 31.

But in the interim, under a settlement agreement (SA) between the two that commenced in October last year, BAC had to agree to a 60% (or RM56.08 million) cut in RM94.03 million of a disputed payment withheld by MAS and a 25% reduction in its final monthly bill to MAS without compromising on the quality of its meals.

The “haircut” saw Brahim’s swing into a net loss of RM40.32 million for the fourth quarter ended Dec 31, 2014, from a net profit of RM12.69 million a year ago. Its gross margin fell 8.5 percentage points to 51.1% that quarter.

For the full FY2014, Brahim’s posted a net loss of RM33.59 million compared with a net profit of RM22.03 million a year ago as revenue slipped 10.45% to RM353.57 million.

Brahim’s, in announcing the SA on Feb 27, said it was “the only option” for it to keep being the inflight caterer for MAS and to stay relevant as a global halal flight kitchen that services 35 other international airlines in KLIA. Its share price fell sharply over the next four trading days.

“The signing of the SA is intended to ease the tight cash flow of BAC and Brahim’s, caused by MAS’ action of withholding payments. MAS has indicated it will not hesitate to look for new caterers to replace BAC ... should BAC not enter into an interim SA pending negotiation of the (new contract),” Brahim’s said in a filing with Bursa Malaysia.

Brahim’s needs to maintain MAS as a customer because it is the only major source of revenue — about 80% — for the group. Analysts, however, wonder to what extent it will have to go to keep MAS as a client.

“The negotiating strength lies with MAS as the two move towards a new contract. I think MAS would prefer to deal with the ‘devil’ it knows rather than a new caterer, but it remains to be seen if what it offers in terms of margins is palatable to Brahim’s,” remarks an analyst.

Getting a new caterer would be “complicated”, the analyst adds. BAC, in which MAS owns a 30% stake, operates a huge kitchen at KLIA, supplying about 60,000 meals a day.

Its closest rival at home — KL Airport Services Sdn Bhd (KLAS) — is small and supplies only about a 10th of the meals BAC does. KLAS, a subsidiary of tycoon Tan Sri Syed Mokhtar Albukhary’s DRB-Hicom Bhd, focuses on ground-handling services but recently moved into inflight catering.

“With a market share of over 90%, BAC seems to be the only credible supplier in terms of experience and efficiency. In the unlikely event the catering deal is terminated, perhaps MAS might let KLAS supply for a few months before getting in a foreign caterer,” another analyst opines.

Earlier in January, Brahim’s entered into a memorandum of understanding with Servair Invetissements Aeroportuaires, a subsidiary of Air France, to collaborate with it and improve commercial and industrial cooperation in the airline catering business. The move sparked rumours that Brahim’s might divest a portion of its catering business to Servair if negotiations with MAS did not end well.

AllianceDBS Research analyst Tan Kee Hoong says Brahim’s inflight catering core Ebit margin (excluding impairments) stood at just 6% in 4Q2014. “We believe the segment’s Ebit margin could trend towards this level in FY15/FY16 versus 13% in FY14,” he says in a March 2 report.

He has a “fully valued” call on the stock and says his target price and earnings forecast for the company are under review pending more news.

He notes that there could be further goodwill impairments from Brahim’s 60% subsidiary Admuda Sdn Bhd, given the abandonment of its sugar refinery venture in Sarawak. “There is still a RM11.7 million goodwill on Admuda that remains in its books, even after a recent RM8 million impairment charge (in 4Q).”

Hong Leong Investment Bank Research has a “hold” call on Brahim’s and a target price of RM1.43 following its 4Q2014 results.

In 2013 and last year, Brahim’s was viewed as one of the stock market darlings and was on track to becoming a mid-capitalised stock before its share price slumped this year.

In the first 10 years of its catering contract with MAS, Brahim’s was provided a minimum baseline revenue by MAS, but this was discontinued in 2012. An MBR was deemed no longer necessary as MAS’ catering requirements had well exceeded the baseline amount in Brahim’s 2009 to 2011 financial years.


This article first appeared in The Edge Malaysia Weekly, on March 9 - 15, 2015.