Brahim’s Holdings Bhd
(Nov 28, RM1.45)
Retain fully valued with a lower target price (TP) of RM0.90. Excluding RM2 million impairment charge on receivables, Brahim’s booked RM3 million in core net profit, taking the first nine months of financial year 2014 (9MFY14) core profit to RM10.6 million. This is below expectations at 59% and 52% of our and consensus full-year estimates, respectively.

The third quarter of FY14 (3QFY14) revenue fell 10% year-on-year (y-o-y) as orders from Malaysian Airline System Bhd (MAS) dropped, but this was largely expected. Earnings before interest and tax (Ebit) margin fell to 11% mainly driven by MAS’ cost reduction exercise. Also, operating losses at Café Barbera had doubled y-o-y, while Dewina-Host Sdb Bhd turned loss-making. Logistics segment Ebit jumped 109% y-o-y.

We cut FY14, FY15 and FY16 forecast earnings by 15%, 20% and 17% respectively after imputing lower Ebit margins at Brahim’s Airline Catering Sdn Bhd.

We also imputed larger losses from Café Barbera, although this is mitigated by higher logistics profits. Note that we had earlier factored in a 20% drop in sales volume to MAS.

Brahim’s operates an in-flight kitchen at the Kuala Lumpur International Airport (KLIA) and Penang International Airport, with a long-term concession agreement with MAS. It also operates a chain of food and beverage outlets at KLIA (through 51%-owned joint venture, Dewina-Host) as well as a chain of Café Barbera outlets.

We understand there are ongoing negotiations between MAS and Brahim’s, the former trying to renegotiate for lower margins. If MAS succeeds, it would hurt Brahim’s future margins. Additionally, impairment charges on receivables suggest there are disputes with customers on pricing, which could reduce margins in the future.

Key upside to our fully valued rating is a favourable outcome of the renegotiation with MAS. In this case, Brahim’s future margins would not be affected. Brahim’s has proposed to acquire a total of 92 Burger King (BK) outlets in Malaysia and Singapore. This could weigh on its financials as the Burger King operations are currently loss-making. It may need large borrowings to finance the acquisition, which would lift finance cost. — DBSAlliance Research, Nov 28

This article first appeared in The Edge Financial Daily, on December 1, 2014.