This article first appeared in The Edge Financial Daily on December 11, 2018
Tune Protect Group Bhd
(Dec 10, 59 sen)
Maintain hold with a lower fair value (FV) of 68 sen: We have maintained our “hold” call on Tune Protect Group Bhd and lowered our FV per share to 68 sen from 80 sen based on a price-to-book ratio of 0.9 times (previously one times) on an FY19 return on equity of 10.5%. The lower forward price-to-book ratio multiple is based on a slightly higher risk premium as earnings remain opaque despite the various strategic tie-ups and digital initiatives of the group which we have yet to see significant contributions to its earnings.
Our FY18, FY19 and FY20 earnings forecasts have been revised by -13%, 4.8% and 3.6% respectively after factoring in expenses of the recently completed voluntary separation scheme (VSS) of its 83.26%-owned Tune Insurance Malaysia Bhd (TIMB), which operates the general insurance business and the cost savings thereafter from the exercise.
In line with its digital initiatives and plans, the VSS was undertaken as part of the group’s business transformation and restructuring.
A total of 58 TIMB employees’ applications for the VSS have been approved. This represents 15% of the subsidiary’s total permanent workforce of 387 employees. The completion of the VSS will see a remaining staff headcount of 329 for TIMB.
Employees whose applications have been accepted will be gradually released from employment — from December 2018 to February 2019 — to facilitate a smooth transition.
A total of RM4 million will be paid out for the VSS. The entire expenses of RM4 million will be booked in the fourth quarter of FY18 (4QFY18). We anticipate this to increase Tune Protect Group’s management expenses for 4QFY18. We now project the group’s FY18 management expense ratio to rise to 41.7% from our previous estimate of 39%, consequently raising its combined ratio to 94.7% for the financial year.
It will take around 13 months to break even for the VSS payment.
Cost savings will start to flow in FY19, and we estimate this to be about RM300,000 per month (RM3.6 million a year) based on a breakeven period of 13 months. Barring any unexpected increase in expenses, the cost savings should translate into a lower management ratio for FY19 and FY20 of 38.1% and 38.2% respectively (versus 39% for both financial years previously).
Recall that for the first nine months of FY18 (9MFY18), profit after tax (PAT) of its the travel insurance business under Tune Protect Re fell 5.8% year-on-year (y-o-y) owing to higher impairment on receivables, facilitator fees and marketing expenses. Meanwhile, TIMB’s PAT improved and grew 12.7% y-o-y for 9MFY18 supported by a stronger underwriting performance on a favourable development in prior years’ claims and closure of time-bared claims. — AmInvestment Bank, Dec 10