This article first appeared in The Edge Financial Daily, on October 26, 2015.

Brahim’s Holdings Bhd
(Oct 23, RM1.05)
Maintain buy with an upgraded target price (TP) of RM1.25: Brahim’s has announced that it had received a conditional binding offer from SATS Investments Pte Ltd (SATS) to acquire 49% of the total issued and fully paid-up ordinary shares in Brahim’s Airline Catering Holdings (BACH) for a cash consideration of RM218 million.

Subject to approval by the board, the RM218 million is payable in two tranches, RM110 million upon the completion of the transaction and RM108 million conditional upon certain financial targets being achieved.

We are positive on this news as the link-up with SATS provides Brahim’s with various opportunities to improve profitability moving forward as well as setting a new benchmark valuation for the catering business, and aiding in reducing gearing.

SATS is an integrated food services company, whose operations consist of both aviation and non-aviation food services.

We believe that Brahim’s will leverage on SATS’ existing network, while simultaneously, SATS will be looking to utilise Brahim’s halal certification and expertise.

This could open up a world of possibilities to both players, such as, but not limited to, tendering for catering services for Middle Eastern airports and airlines, as well as non-aviation catering in the region.

Our checks suggest that currently SATS is most active in the Asia-Pacific region.

Assuming that Brahim’s will pare down its entire debt, at RM150 million in the second quarter of 2015 (2Q15), this would bring it to a net cash company.

Furthermore, this would imply an interest savings of about RM10 million per annum.

We opine that this corporate development has set a precedence in terms of valuing Brahim’s halal expertise and know-how in the catering business.

Earnings would still be lacklustre in the coming quarters due to the challenging environment of the aviation industry as a whole. Furthermore Malaysia Airlines, the anchor customer, is undergoing restructuring.

However, SATS’ entry into the picture has brightened the prospects.

Risks include a slowdown in passenger movements, termination of concession agreements, and relatively elastic demand.

Forecasts remain unchanged pending further guidance by management. This corporate development has set a new benchmark in terms of valuations. Our new TP implies a price-to-book ratio of 1.25 times, with the other businesses free. — Hong Leong Investment Bank Research