Tough times for Brahim's

Ibrahim is quite worried about the growth outlook for Brahim

THESE are testing times for Datuk Ibrahim Ahmad Badawi, the controlling shareholder and executive chairman of Brahim’s Holdings Bhd, a provider of inflight meals.

His immediate woes stem from the troubles of his largest customer, Malaysia Airlines (MAS), which booked a RM443.39mil loss for the first quarter ended March 31.

This is 59% more than the losses posted compared with the corresponding quarter in 2013 despite the marginal 1.98% rise in profit to RM3.6bil. This is also the airline’s fifth consecutive quarter of losses as well as the largest in over two years.

Understandably, the affable Ibrahim is quite worried about the growth outlook for Brahim’s in the immediate term. “The share price fell 11 sen after the talk on bankruptcy (of MAS),” he exclaims, referring to Prime Minister Datuk Seri Najib Razak’s interview with the Wall Street Journal on May 15.

The company derives between 70% and 75% of its revenue from catering inflight meals to MAS. The remainder of the revenue mostly derives from catering meals to other airlines which fly from Kuala Lumpur International Airport (KLIA) and now from KLIA2 with the restaurant and warehousing businesses making up the rest.

The longer term woes involve MAS’ cost rationalisation, which will have both financial and image repercussions for Brahim’s as serving cheaper meals will mean margins will come under pressure while cheaper food may result in customer backlash due to negative public perception that this may mean lower quality issues.

An example of the backlash was the “naked nasi lemak” episode which saw Chef Wan posting on Instagram that his meal had only half a hard boiled egg and some sambal to accompany the rice, which the airline attributed to stale and contaminated anchovies and peanuts on Jan 29.

Given the troubles that MAS is going through, which has been made worst by the disappearance of MH370, inflight meals or the quality of these meals may be the last thing on its list of priorities right now. On average, food and beverage expenses make up between 1.5% to 1.8% of MAS’ total operating costs, which came up to RM14.16bil for the financial year ended Dec 31, 2012.

According to Ibrahim, inflight meals are an important part of the air travel experience, a fact reinforced by the higher margins that Brahim’s makes out of foreign airlines that the company also caters to, according to analysts. “I intend no malice when I say that MAS is not prioritising inflight meals like other airlines,” he says.

Ibrahim says the company has not been impacted in the first quarter, which has yet to be announced, but sees a challenging second quarter on account of MAS. He noted that last year was the company’s best year yet, posting RM22.21mil net profit on the back of RM394.72mil revenue.

Looming over Brahim’s and its 25-year concession with MAS is the possibility of a restructuring that the airline may have to go through in order to survive. This may involve renegotiating contracts with suppliers. Ibrahim and the company’s managing director Mohamed Zamry Mohamed Hashim admits that Brahim’s exposure to MAS has been an issue discussed by the board.

Brahim’s has been busy signing up foreign airlines and now caters inflight meals to more than 30. Six were signed up last year – Air France, Turkish Airlines, Philippine Airlines, XiamenAir, NasAir and an extension with Emirates – these airlines are expected to contribute RM25mil in topline this year.

Ibrahim says that the company signed up Lufthansa earlier this year and is targeting another three foreign airlines this year.

While the inflight catering business will remain a mainstay, Brahim’s has been busy looking for opportunities to expand its other businesses. This will closely involve privately-held Dewina Holdings Sdn Bhd, which have ventures in food manufacturing in the Middle East.

“It’s a conscious effort on the part of the board to not rely entirely on the airline business,” Mohamed Zamry explains.

Ibrahim, also the executive chairman of Dewina Holdings, says the food manufacturing business is something which Brahim’s will be pursuing in tandem with Malaysia’s strategy to become a halal hub. This includes talks with three companies who want to co-invest with Brahim’s to tap the global halal market.

He notes that Japanese companies, in particular, have displayed a lot of interest in the highly lucrative halal market in the last two years, while Brahim’s Food Japan Co Ltd, set up in July 2012, now has products in 450 stores.

But beyond growing organically, Ibrahim is not ruling out mergers and acquisitions (M&As). In fact, he is looking at six to seven M&As this year in which Brahim’s will have a majority stake.

Naturally, assets under Dewina Holdings have also been speculated since last year as targets.

Dewina’s ventures in Saudi Arabia and Jordan are among the assets which may eventually be injected into Brahim’s. “Of the two, the Jordanian venture may be the most likely target following promising first quarter operating profit of RM5.04mil,” Ibrahim says, adding that this was just from providing meals to the Jordanian military.

He says there are plans to develop a line of commercial products including Arab-style value meals while the Saudi venture, which is to provide meals to pilgrims in Mecca, will take off as soon as some land issues are resolved. The facility, which can make a minimum of 10 to 12 million meals annually on a single shift and can be scaled up, will be ready by 2016.

Another growth area for the company is the sugar refining business. Ibrahim says the RM150mil sugar refinery in Sarawak will be operational in 2016 and bring in revenue of RM400mil a year. He reckons the sugar business will balance out the earnings contribution from inflight catering, which also brings in RM400mil per annum. “This will cut our dependency on the inflight catering business to about 50%,” Ibrahim says.

Going forward

Questions have been asked about whether Desatera Sdn Bhd will eventually be listed. Desatera is a joint venture (JV) between Dewina Holdings, which owns a 70% stake in the company, and Koperasi Angkatan Tentera Malaysia Bhd, which owns the remainder stake. The JV was awarded a contract to operate military cookhouses until 2026.

According to Ibrahim, its “only a matter of time” before Desatera is listed or is injected into Brahim’s. “The listing is allowed for in the JV agreement,” Mohamed Zamry adds.

However, Ibrahim says Dewina Food Industries Sdn Bhd, a unit of Dewina Holdings supplying combat rations to the army amongst other things, will continue to be privately held. “This is because being a military contract, there is sensitive information which will have to be divulged if its injected into Brahim’s,” he says.

Meanwhile, Brahim’s will soon have Lembaga Tabung Haji play a bigger role in the company. “The fund has been asking us for a board seat for some time now but I told them for a board seat, you’ll need to have at least a 15% stake,” he says.

Other institutional funds which have approached him for a bigger stake included the Employees Provident Fund and Retirement Fund Inc.

Ibrahim decided to go with LTH because of the synergies between the pilgrim’s fund and the company. He sold four million shares at RM2.15 per share to the fund on May 12, thereby paring his stake to 40.63%.

Now LTH has 14.9% stake in Brahim’s while Koperasi Permodalan Felda has a 5.17% stake.

“I’m not sure how the market views it but it was a strategic decision on our part because there is synergy with LTH. Pilgrim meals are closer to their end and they are also very much interested in contributing,” he says, adding that LTH chairman Datuk Seri Abdul Azeez Abdul Rahim will be sitting on Brahim’s board.

But for the moment, despite the troubles at MAS, Brahim’s is still sitting pretty as it supplies 92% of all inflight meals originating from KLIA and sees growth from KLIA2, where the company has signed a deal with AirAsia X. Analysts have also noted that even if ticket sales for MAS flights drop, they may likely move to other customers of Brahim’s, where the margins are higher.

As Ibrahim puts it: “The reality is this - we are the only viable caterer in the airport. As long as planes fly off from KLIA, we will be there.”