This article first appeared in The Edge Malaysia Weekly on February 6, 2023 - February 12, 2023

BRAHIM’s Holdings Bhd (BHB) is hoping to turn its fortunes around by riding the recovery wave in the air travel market, with airlines reinstating flights that were suspended during the Covid-19 pandemic to meet surging demand.

It has been seven months since the financially distressed airline catering company was delisted from Bursa Malaysia, and there seems to be no respite from its troubles as it needs to raise cash and shore up its balance sheet in a hurry. Its latest balance sheet data shows that BHB’s shareholders’ equity was negative RM173.64 million as at end-March 2022, widening from negative RM163.36 million as at end-2021.

In addition, BHB had total debt of RM237.7 million, of which RM236.75 million is due within 12 months and RM957,000 due beyond that. It held RM5.7 million in cash, leading to net debt of RM232 million.

The group has been making losses since 2014, posting a net loss of RM11.28 million on revenue of RM33.57 million for the most recent financial year ended Dec 31, 2021 (FY2021) before it was delisted.

These losses were aggravated by the two years of Covid-19, which saw the number of in-flight meals it produced plunge to below 1,000 per day as airlines grounded their aircraft. In June last year, its shares were delisted from Bursa after it failed to regularise its financial condition, including the settlement of RM49.88 million in debt to OCBC Al-Amin Bank Bhd.

BHB has, however, shown turnaround signs, according to its executive chairman Datuk Seri Ibrahim Ahmad. He says the number of in-flight meals BHB serves has increased to over 30,000 a day since last year — the “break-even” point on operations — as airlines resume service after a pandemic-induced hiatus. However, the number is still below the 2019 average of 50,000 meals per day.

In an interview with The Edge, Ibrahim, 75, says that BHB had been looking to secure funding from banks and the government during the pandemic, but efforts failed amid market conditions and continued uncertainty over airline travel, and BHB’s earnings had deterred investors from committing capital.

Sources tell The Edge that BHB and Malaysia Aviation Group Bhd (MAG), the parent company of Malaysia Airlines Bhd (MAB), had recently held talks on the sale of BHB’s 70% stake in Brahim’s Food Services Sdn Bhd (BFS) to the national carrier. BFS is the largest contributor to BHB’s top line, contributing about 90% to its total revenue, and is the principal in-flight catering service provider at Kuala Lumpur International Airport (KLIA) and klia2 in Sepang as well as Penang International Airport.

MAB holds a 30% stake in BFS, with the remaining 70% held by BHB through its 51% equity interest in Brahim's Dewina Investment Holdings Sdn Bhd, formerly known as Brahim’s SATS Investment Holdings Sdn Bhd. The remaining 49% in Brahim's Dewina Investment Holdings is held by Dewina Brahim’s Holdings Sdn Bhd — the private investment vehicle of Ibrahim and his family.

However, the talks fell through as the selling price that Brahim’s SATS Investment Holdings had asked for its 70% stake was too high, according to sources.

“BFS has a negative net worth. Furthermore, the estimated capital investment that MAG will have to spend to bring BFS’ catering equipment up to date is a lot, probably too much. The aviation group didn’t have the appetite for it after coming out of a debt restructuring exercise that saw a RM3.6 billion capital injection from its controlling shareholder Khazanah Nasional Bhd. Spending more money (for the 70% stake in BFS) would only deteriorate its cash position,” a source familiar with the matter says.

Sources also point out that MAB is not an expert in airline catering. “MAB doesn’t have the resources to run catering. And there will be a lot of risks involved in starting from scratch.”

Filings with the Companies Commission of Malaysia (SSM) show that as of Dec 31, 2020, BFS’ net worth was negative RM57.6 million. The company suffered a net loss of RM17.89 million in FY2018, but managed to turn a profit of RM2.92 million in FY2019. It slipped back into the red with a RM126.15 million net loss for FY2020. Financial statements for FY2021 were unavailable.

When asked, Ibrahim says: “Yes, as a partner we are in constant engagement with them, but I cannot comment on MAB’s intention of buying back the remaining 70% equity (in BFS). We have been approached by various parties and are always open to all options.”

He adds: “We are willing to listen to anybody. Come with any proposal (and we can start negotiating). We have got quite a number of companies keen to form joint ventures. I am keeping my options open.”

Following the delisting, Ibrahim now owns 25% of BHB shares. The remaining 75% is held by 4,000 shareholders.

Contrary to what many bankers think, Ibrahim believes that the airline catering business is here to stay. “As long as planes fly, you need catering. In terms of future business, it is not a sunset industry. In fact, it is growing. The latest aviation industry reports point to a full recovery (in global air travel) by 3Q2023, which is earlier than the International Air Transport Association’s estimate of 2024.”

Following various cost-cutting moves during the pandemic, BHB will now focus on air travel recovery and optimising its operations to generate sufficient cash flow to meet its expenses.

“We had to cut the group’s 1,400 workers by half due to reduced demand during the pandemic. In 2021, we also managed to negotiate with the government a lower rent for our in-flight kitchen at KLIA in Sepang, from RM1.88 million a month to RM1 million a month. On the flip side, the lower operating costs have enabled us to reach cash flow break-even and recover quickly,” says Ibrahim.

He continues, “At 30,000 meals a day, we are already breaking even. By the middle of this year, we expect to hit higher numbers and things to normalise in 3Q. By then, I am confident that the banks will be willing to talk to us about new funding. We continue to engage with our bankers and current shareholders for fundraising.”

In July 2021, the group had issued 70.89 million shares via a private placement exercise, raising RM11.34 million in cash for working capital.

BFS has seen two-thirds of its customers return post-pandemic. “Major airlines such as Qatar Airways, Emirates, Etihad Airways and British Airways have returned. In fact, Turkish Airlines just renewed a three-year contract with us,” says Ibrahim.

BFS was serving 35 international airlines with MAB as the major customer in 2019 before the pandemic hit. BHB’s annual report for FY2021 shows that its other customers included AirAsia, AirAsia X, Batik Air, Cathay Pacific, Vietnam Airlines, All Nippon Airlines (ANA), Oman Air, Japan Airlines, Garuda Indonesia and Eva Air.

Still, in April 2021 BHB had revealed that it was at risk of defaulting on its payments amounting to RM49.88 million in its banking facilities from OCBC. In May last year, pursuant to a put option notice, the group announced that it is required to settle RM79.26 million owing to the bank.

“We are going to address that (RM79.26 million payment). I cannot give you any details but it is under control and we will get it sorted out by this year,” says Ibrahim.

In its filing with Bursa in April 2021, BHB revealed that it was engaging in discussions with OCBC for a haircut and settlement.

Once an investor favourite, BHB’s stock price reached its record high of RM2.64 in March 2014 after it reported its highest ever net profit of RM22.03 million on revenue of RM394.83 million for FY2013. BHB last traded at one sen per share on April 15, 2022, translating into a market capitalisation of RM3.07 million, prior to the delisting of its securities from Bursa on June 3, 2022.

As airlines ramp up their flight capacities to meet demand in the pandemic recovery, they seek to elevate their service to win back travellers and match the skyrocketing airfares, mostly thanks to demand exceeding capacity and higher fuel costs. To many travellers, the quality of in-flight food is an important part of the customer experience.

“The fact remains that MAB is struggling to provide travellers with quality in-flight meals, which are provided by BHB,” an industry observer says. People familiar with the matter say BHB’s debt-laden balance sheets mean it has less money to invest in more modern technology, grow its business, hire people and develop innovative products. “Since it is now delisted, the option to access the huge capital market is also no longer available,” the industry observer adds.

Ibrahim begs to differ. “We are continuously looking at new technologies and processes in order to enhance our service delivery to our customers, who have always been our priority. In fact, just two weeks ago we received compliments and positive feedback on our meals and services from both ANA and Turkish Airlines, which are among the top 10 airlines in the world. For the record, most of the top 10 airlines that fly into KLIA are our customers including Qatar Airways, Emirates, Cathay Pacific, British Airways and Eva Air.

“We always work with our customers to provide the best food possible but it often becomes very challenging if the customer has budgetary constraints. The point that we want to stress is, ‘You get what you pay for’.”

He cites Qatar Airways, which was named 2022 World’s Best Airline by Skytrax (the seventh time the carrier has won). “They spend a lot to maintain their in-flight food quality.”

Ibrahim reveals that BHB is currently negotiating a new three-year catering agreement with MAB, with an option to renew for another two years.

BHB had in 2015 signed with the national carrier for a period of five years, with an option to renew for another five years. “But in 2020, in view of the restructuring exercise undertaken by MAB, the catering contract was not renewed. As a result, the contract has been on an annual basis since then,” he says.

Prior to that, BHB was the exclusive in-flight caterer for Malaysia Airlines at KLIA and Penang International Airport under a 25-year agreement expiring in 2028, but this was renegotiated under the 12-point MAS Recovery Plan.

“MAB has a 30% share in our catering company from the time we bought 70% of MAS Catering Sdn Bhd back in 2003 for a high price of RM170 million cash, plus carrying RM240 million in accumulated losses, which we managed to wipe out in our ninth year of operation with an earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM59 million before the twin tragedies (of MH370 and MH17) and the MAS Act of Parliament that caused us a first-time loss of RM33.8 million in FY2014,” says Ibrahim.

Despite the misgivings BHB harboured over the past years for getting the raw end of a settlement deal with Khazanah Nasional under the MAS Recovery Plan in 2015, BHB remains confident about carrying on as MAB’s in-flight caterer.

BHB represents the country’s largest in-flight catering company, with a maximum capacity of producing 90,000 meals per day.

“Our closest competitor only has about 15% of our total capacity,” says Ibrahim, referring to Pos Aviation Sdn Bhd, a wholly-owned subsidiary of Pos Malaysia Bhd, which provides ground handling, cargo handling, in-flight catering and aircraft maintenance services.

He points out that the group’s 59,000 sq m flight kitchen at KLIA was built for RM400 million. “Building a new flight kitchen would easily cost RM200 million. Then, you have to put in staff, train them and get customers. Today, we (BHB) serve 35 airlines at KLIA, built over the years.”

MAB also owns a 60% stake in MAS Awana Services Sdn Bhd, which caters in-flight meals for MASwings Sdn Bhd, MAB and foreign carriers in Kota Kinabalu and MAB’s airline lounges. The remaining 40% stake is held by Evergreen Revenue Sdn Bhd, which has a paid-up capital of RM1.7 million and is equally owned by its executive directors Marzuki Madon and Amlah Yassin.

According to sources, MAS Awana can only handle 4,000 in-flight meals a day while MAB’s daily requirements are 20,000 meals. “MAS Awana also doesn’t have the facilities inside the airport area to transport the food to the aircraft.”

Post-pandemic, BHB has been looking to non-aviation-related businesses in a bid to reduce its dependency on the airline catering business.

“We are going to build up our non-aviation business, which is supplying ready-to-eat frozen products to hypermarkets and supermarkets such as AEON Big and Maxvalu, as well as restaurants. Ultimately, we hope to achieve a 70:30 or 60:40 revenue contribution between the aviation and non-aviation businesses,” Ibrahim shares.

Still, it remains to be seen whether he will be able to deliver a turnaround plan for BHB and capitalise on soaring demand for air travel in order to restore the balance sheet.  

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