KUCHING: The worst is over for Brahim’s Holdings Bhd (Brahim’s) after two years of losses, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) opines.
According to HLIB Research, it is important to highlight the losses incurred in the subsequent years after two Black Swan events in financial year 2014 (FY14).
The research arm noted that the subsequent privatization and restructuring of Malaysia Airlines (MAS) continued to affect Brahim’s throughout FY15 while delays in the finalization of the ‘New Catering Agreement’ (NCA), which only took place at the end of the third quarter of 2015 (3Q15) continued to hamper earnings throughout 2015.
However, HLIB Research was of the opinion that the worst was over for Brahim’s after two years of losses and cloudy earnings prospects.
“The signing of the ‘New Catering Agreement’ (NCA) and entrance of SATS have brightened the earnings and strategic outlook for Brahim’s,” it said.
HLIB Research noted that Brahim’s bottom-line is poised for a recovery in FY16 on the back of the recalibration post divestment and several short-to-mid-term catalysts for the company.
“As such, the stock warrants a re-rating,” it added.
HLIB Research highlighted that in the near term, the recovery in demand for air travel is a positive for Brahim’s due to the correlation between meal volumes and the increased demand for air travel.
The research arm said that in the past two years, meal volumes have been on a downward trajectory due to sentiments regarding MAS and its rationalization plan.
It added that the recent stabilization of ringgit will also aid a recovery in air travel demand as purchasing power returns after a two year hiatus.
Meanwhile, HLIB Research pointed out that Brahim’s is looking to venture into other business segments within the aviation services space apart from cabin handling.
“The next frontier that Brahim’s could potentially explore falls within the ‘Gateway Solutions’ space, which includes: airfreight, bagging, ramp handling, cargo, laundry services and passenger services,” it said.
On another note, the research arm observed that the tie up with 7-Eleven Malaysia (7EM) represents a significant coup to Brahim’s in the group’s forays to diversify away from aviation catering.
It noted that the tie-up secures Brahim’s a channel with tremendous potential for scalability.
On the forecasts for the group, HLIB Research adjusted FY16 earnings by an increase of 123 per cent to account for the turnaround in air travel demand and normalisation of business for Brahim’s.
The research arm also introduced its FY17 forecast.
All in, HLIB Research upgraded its call on Brahim’s to ‘buy’. The emergence of SATS as a strategic partner has brightened prospects in providing an operational blueprint for the group.
“Whilst growth in the non-aviation catering segment will take time to fruit, the recovery in airline passenger traffic and gradual ringgit appreciation, as well as cementing the NCA are near term catalysts that moot the re-rating,” it said.