7 things I learned from the 2019 BRAHIMS (9474) Brahim’s Holdings AGM - Shak Chee Hoi

By Shak Chee Hoi on July 1, 2019

Brahim’s Holdings Berhad (BHB) provides halal inflight catering to 35 international commercial airlines at Kuala Lumpur International Airport (KLIA), KLIA2, and Penang International Airport. It also operates restaurants and cafes in KLIA and KLIA2 and provides cabin-handling services. On average, it serves 50,000 meals to 200 flights daily.
BHB used to solely be in the warehouse and logistics business until it acquired a 51% stake in LSG Sky Chefs — an in-flight caterer and service operator — in 2008, before acquiring the remaining 49% stake in 2012.
However, in March this year, BHB triggered Practice Note 17 (PN17) status after its shareholders’ equity fell below the 25% threshold, which caused its share price to crash 43.9% in one trading day.

Chart: Google

I was curious to find out how the management planned to turn the company’s situation around. Here are seven things I learned from the 2019 Brahim’s Holdings AGM:
1. Revenue decreased 5.9% year-on-year to RM274.3 million in 2018. Although revenue has grown at a compound annual growth rate (CAGR) of 9.8% from 2008 to 2018, it has fallen by 30.5% since 2013.

Source: BHB annual reports

The deterioration of revenue is largely due to its dependency on its largest customer, Malaysia Airlines Berhad, that has suffered losses since 2011 and was further hit by two air disasters in 2014. The airline underwent a number of reorganisation plans, which led to the suspension of routes and reduction of flight frequency. In the end, fewer passengers for Malaysia Airlines means fewer orders for BHB. The Malaysian government is also in the midst of considering whether to shut, sell, or refinance the airline. In the worst-case scenario, BHB could lose half of its total revenue that’s contributed by Malaysia Airlines alone. According to Chairman Ibrahim bin Haji Ahmad, another 34 airlines contributed to the other half of BHB’s revenue. BHB has a high customer concentration risk although contribution of total revenue from Malaysia Airlines has dropped from 80% previously.
2. BHB would record a net profit of RM8.1 million in 2018 if impairment losses amounting to RM113.9 million in the same year are excluded. Net profit has fluctuated over the past 10 years. Besides falling revenue, operating expenses was one issue brought up by a shareholder at the AGM. On average, 93.6% of total revenue has gone to operating expenses since 2008, which leaves very little room for profit. Operating expenses increased from RM103.2 million in 2008 to RM277.8 million in 2018 — a CAGR of 10.4% which is higher than its 9.8% revenue CAGR growth over the same period. During the AGM, the directors shared that they had no plans to lay off workers. The chairman also attributed the increase in SGA expenses in 2018 to internal restructuring where SATS Limited assigned their staff to assist BHB workers on improving their daily operational efficiencies.

Source: BHB annual reports

3. In the past 11 years, BHB has only distributed a dividend once to shareholders — in 2013 at RM0.25 per share. Since 1999, the amount of capital raised from shareholders is greater than the amount of capital returned to shareholders.
4. PricewaterhouseCoopers, the external auditor of BHB, raised its concern over BHB’s ability to pay its debt. BHB managed to negotiate with financial institutions including OCBC Bank to defer its instalment payable. As of 31 December 2018, BHB’s debt servicing ratio stood at 221.7% and its debt-to-equity ratio stood at 10.2.
5. Since February 2019, BHB has been classified as a Practice Note 17 (PN17) company after its shareholder equity fell below the 25% threshold. The directors do not seem to have a concrete plan to resolve the issue and are possibly looking for a white knight to rescue the company. At the AGM, they mentioned they were open to a reverse takeover even if it might cause a change in business directions. However, the company subsequently announced that it would not significantly change its business direction and is the midst of formulating a self-regularisation plan instead. BHB until February 2020 to do submit its plan to the authorities for approval. The company may also consider hiving off its logistics business that isn’t performing very well.
6. Revenue is not recurring as BHB needs to regularly participate in tenders to secure contracts with customers. BHB’s revenue also largely depends on the tourism sector. In 2018, Malaysia missed its tourist arrivals target for eight consecutive years and the number of tourist arrivals dropped 0.4% year-on-year to 25.8 million.
7. BHB wants to be less dependent on the airline catering business by doubling revenue contribution from its non-airline catering services in the next three to five years. Currently, the non-airline catering services only accounts for 1-2% of total revenue. BHB also wants to maximise its kitchen capacity from 50,000 meals currently to 60,000 meals per day. In January 2018, BHB secured itself as the main catering operator for Keretapi Tanah Melayu Berhad, a rail operator in Peninsular Malaysia, and Universiti Kebangsaan Malaysia, a public university.

https://fifthperson.com/2019-brahims-holdings-agm/