BRAHIM’S HOLDINGS BHD
By Hong Leong Investment Bank
Target price: 56 sen
HONG Leong Investment Bank (HLIB) Research, having had a meeting with the company’s management, said it felt discouraged about the group’s near term earnings prospects, given the lack of near-term revenue and earnings growth drivers.
“Brahim’s catering contract with Malaysia Airlines Bhd (at an estimated price of RM12.50 per meal) remains the bread and butter for the group.
While Brahim’s will benefit from Malaysia Airline’s gradual rise in passenger volume, this will unlikely enhance Brahim’s overall profitability in the near term,” the research house said.
According to HLIB, management guided that Qatar Airway had switched back to Brahim’s since July 2017 (three flights a day) with an estimated contract value of RM9mil per annum.
“Given the small size of the contract (circa 3% of annual revenue), we see insignificant earnings impact arising from comeback of Qatar Airways.
“It is also unlikely to boost Brahim’s overall capacity utilisation significantly.
“While Brahim’s is actively seeking other sizeable non-airline catering agreements in order to optimise its kitchen utilization and to diversify its revenue stream, we believe it would take a while before new contracts come to fruition.”
HLIB said it downgraded to “hold” from “trading buy” due to the absence of immediate earnings growth catalyst.
“Meanwhile, the turnaround of Malaysia Airlines has largely-been priced-in, in our opinion.”
Post earnings revision, the research housed said it is lowering its target price on the stock (by 36%) to 56 sen, based on 16-times revised 2018 earnings per share of 3.5 sen.
“We downgrade our recommendation stock to ‘hold’ as valuation is no longer compelling post downward earnings adjustment,” it added.
KOSSAN RUBBER INDUSTRIES BHD
By CIMB Research
Target price: RM7.55
ACCORDING to CIMB Research, the decline in Kossan’s 2016 net profit to RM170.9mil was due to a combination of external and internal factors.
In addition to stronger-than-expected pricing competition, the research house said Kossan suffered capacity loss from two factories that faced revamp works starting from the second quarter of 2016, up to the early portion of the fourth quarter of 2016.
“Also, margins were hit by hikes in natural gas prices and minimum wages. From the first quarter of 2017, Kossan recorded equally stronger performance as total capacity reverted to normal.”
The research house said it expected Kossan to record stronger performance in 2017, supported by a better second half of the year, especially with a new three billion pieces per annum plant that is expected to begin operations by this month.
“This is the first new plant to be added since December 2015, growing capacity to 25 billion per annum.
“This timeline is ahead of our estimates as we had earlier projected for the new plant to only begin production in the fourth quarter of 2017.
“This leads to earnings upside to our 2017 estimates.”
CIMB Research added that Kossan would add two new plants in 2018 with total capacity of 4.5 billion per annum.
“The first plant is slated for completion by the first quarter of 2018 and the second plant will begin operations in the third quarter of 2018.
“We gather that all of its new plants have been earmarked to manufacture its patented accelerator-free nitrile gloves, with latest automation to be installed along with high-speed dipping manufacturing lines,” the research house added.
The research house said Kossan would carry on conducting revamp works on its existing facilities to increase overall operating efficiencies.