This article first appeared in The Edge Financial Daily, on April 18, 2016.

Brahim’s Holdings Bhd
(April 15, 94.5 sen)
Maintain hold with a target price (TP) of RM1: Brahim’s Holdings Bhd’s SATS Food Services Sdn Bhd (BSFS), a subsidiary of Brahim’s, has signed a memorandum of understanding with 7-Eleven Malaysia Sdn Bhd for the supply of various chilled and packaged, and ready-to-eat meals. 

The initial partnership aims to supply about 20 stores in the Klang Valley and Penang. It is understood that BSFS will plan, develop and create menu specifications and products to be marketed throughout 7-Eleven’s nationwide chain of convenience stores. 

The targeted date to start supplying will be later this month.

We are positive on this news as it reflects Brahim’s ongoing initiative and strategy of diversifying from airline catering. Recall that Brahim’s has also tied up with Keretapi Tanah Melayu Bhd and MAHSA University to provide catering services. 

Furthermore, 7-Eleven is the leading convenience store brand in Malaysia. It has a dense network and trusted brand name, with a larger customer base and greater duration of access to products. 

As at the fourth quarter of 2015, there were 1,944 7-Eleven stores throughout Malaysia with another 200 targeted to open in the financial year ending Dec 31, 2016 (FY16). We expect BSFS to be able to cater to at least 100 stores by the end of FY16, equivalent to 5% of existing 7-Eleven stores. 

We understand that approximately 35% or 680 7-Eleven stores are in the Klang Valley alone. We estimate that the potential revenue generated from 7-Eleven sales for the remainder of 2016 to be in the range of RM800,000 to RM1.3 million or 0.5% to 0.8% of our FY16 top-line forecast. 

Our back-of-the-envelope calculations imply that this venture could potentially add 3% to 9% to Brahim’s future annual revenue.

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 BSFS fail to bear fruit.

The emergence of BSFS as a strategic partner has brightened prospects in the long term. — Hong Leong Investment Bank Research, April 15