Brahim's settlement with MAS a bad deal

PETALING JAYA: Analysts believe that the settlement agreement between Brahim's Holdings Bhd and Khazanah Nasional Bhd, which saw the group agree to payment cuts and discounts for Malaysian Airlines System Bhd, is a negative deal for the group that will see it lower margins in its new catering agreement (NCA).
Investors echoed the sentiment, as selling pressure pushed Brahim's shares to close 14 sen, or almost 12%, lower at RM1.17 yesterday, with a total of 1.59 million shares traded.
"They will get a new contract but pricing and margins will be lower," AllianceDBS Research analyst Tan Kee Hoong told SunBiz yesterday. Gross margins for the group in the last three financial years stood at above 55%.
Although Brahim's said that signing the settlement agreement was the only option for it to maintain its role as an inflight meals caterer to MAS, Tan said the settlement agreement is a negative deal for Brahim's because it would end up with write-downs and lower margins.
An industry observer who declined to be named said Brahim's will continue to be MAS' inflight meals caterer, adding that chances of Brahim's and MAS not being able to agree on a NCA are slim.
"There will be a new catering contract. That's why the settlement agreement was signed."
Brahim's executive chairman Datuk Ibrahim Ahmad Badawi did not respond to queries from SunBiz.
Khazanah Nasional Bhd in a statement yesterday as part of its quarterly report on the progress done on its MAS recovery plan, had said that should a NCA not be concluded within the timeframe, MAS will look at alternative catering suppliers to service the newco, Malaysia Airlines Bhd.
It added that MAS management is currently evaluating several options to ensure that in the event a NCA is not signed, there is no disruption to its current operations and that there is a smooth transition to the newco.
Last Friday, Brahim's said it agreed to a 60% cut in payments withheld by MAS amounting to RM94.03 million and a 25% reduction in its final monthly bill in a settlement agreement intended to ease the tight cashflows of Brahim's and its 70%-owned Brahim's Airline Catering Sdn Bhd (BAC) caused by MAS withholding payments.
MAS had also indicated that it will not hesitate to replace Brahim's with new caterers should BAC not enter into the interim settlement agreement pending negotiation of a new catering agreement.
Last week, the group also aborted the proposed acquisition of the Burger King franchise in Malaysia and Singapore after shareholders voted against the deal.
With its tight cashflows and net loss of RM33.59 million for the financial year ended Dec 31, 2014, the group would likely face problems raising funds for the Burger King deal if shareholders had approved it. Its total liabilities as at Dec 31, 2014 stood at RM252.38 million.
Brahim's, via BAC, has a 25-year contract for catering and related services at KLIA and Penang International Airport which expires in 2028. The aborted Burger King deal was a chance for Brahim's to diversify its earnings.