Brahims to see 22.5% cut to earnings on MAS capacity cut, says HLIB Research

by **Cals** Wed 21 May 2014, 01:45

Business & Markets 2014

Written by Jonathan Gan of theedgemalaysia.com

Tuesday, 20 May 2014 10:25

KUALA LUMPUR (May 20): Brahim Holdings Bhd bottomline could see a 22.5% cut should Malaysian Airlines System Bhd (MAS) assume a 30% cut in capacity, according to Hong Leong Investment Bank Research (HLIB).

However, the research house added that travelers may opt for other airlines (which could be Brahim’s existing customers), and hence the impact could likely to be much less than 22.5%.

In a note today, the research house said that the cut could result in Brahim's FY14 earnings and FY15 declining.

HLIB analyst Grace Chew said that on a worst-case scenario (assuming variable costs constant despite lesser passengers travelled),

Brahim’s bottomline could be hit by about 22.5%, which would result in its FY14 earnings declining by RM6.4 million to RM21.98 million.

“FY15 earnings would be lower by RM8.4 million to RM29 million,” she said.

“Based on potential decline in earnings stated above, our target price (TP) would likely be reduced to RM 2.81 (but still implying a 42% upside to closing price of RM1.97),” said Chew.

In the event that MAS ceases operations entirely, Chew added that MAS/government would need to compensate Brahim’s based on the concession agreement of fair value plus 20% premium.

“Based on the RM130 million paid my Brahim's to purchase additional effective stake of 34.3%, Brahim’s would be paid RM318 million for the termination,” said Chew.

She added that the company’s latest collaboration with the Makkah government to supply food to the pilgrims would potentially result in a significant boost to Brahim's earnings starting FY16

“Maintain buy on Brahim’s with unchanged TP of RM3.13 based on average of 18 times and 9 times price/earnings and enterprise value/EBITDA respectively,” recommended Chew.

At 9:46am, Brahims was up 2 sen to RM 1.99 per share with 130,000 shares done.