Saudi Airlines Catering announced yesterday that it is in negotiations with its largest shareholder (c36% stake) and main client Saudia (c65% of revenue) regarding the renewal of the Saudia Catering Agreement (currently running from 1 Jan. 2015 to 31 Dec. 2019), as well as other agreements covering in-flight sales (Sky Sales) and aircraft equipment. The contracts being negotiated represent c58% of Catering’s total revenue. The company did not disclose a specific date on which talks will be concluded, but said that the negotiations will likely have a “positive outcome”. More details will be disclosed in due course. Under the Saudia Catering Agreement, Catering is the exclusive provider of in-flight catering services on all Saudia flights (with the exception of inbound flights on long-haul routes). It is a cost-plus contract with fixed multipliers that vary for different menu items, with the airline currently paying a minimum monthly payment (cSAR100mn), in addition to a large settlement that usually takes place at year-end.   The news is negative, in our view, and potentially confirms one of our main concerns regarding the sustainability of Catering’s strong profitability profile, as its main client, Saudia, attempts to achieve cost efficiencies in a tough economic backdrop. We do not rule out an unfavourable change in the contract’s margin and payment terms before starting a new term (from 1 Jan. 2020), given the unusually early start of negotiations. We reiterate our Neutral rating on the stock. (Company disclosure, Hatem Alaa, Nada S. Amin)   Saudi Airlines Catering Company: SAR94.74 as of 21 November 2016, Rating: Neutral, FV: SAR110.00 per share, MCap: USD2,072mn, CATERING AB / 6004.SE