This article first appeared in The Edge Financial Daily on June 21, 2017

Tune Protect Group Bhd
(June 20, RM1.27)
Maintain add with a lower target price (TP) of RM1.71: We are less positive on Tune Protect Group Bhd following the recent meeting with the company. This is because it stated that the positive earnings impact from new initiatives, including the bundling of insurance products for AirAsia Bhd’s customers, would not be significant in the near term.

Previously, we thought the new initiatives would help boost its premium growth in the coming quarters, leading us to forecast a 3% premium growth for the financial year ending Dec 31, 2017 (FY17) despite a weak 1.5% expansion in the first quarter ended March 31, 2017 (1QFY17).

Since May 2017, Tune has started to bundle its products for AirAsia customers for the Premium Flex, Premium Flatbed and Value Pack classes.

Although this will increase the take-up rate of its products, the impact on its top and bottom line would not be significant because customers of these three classes only account for about 6% of AirAsia’s total passengers, and the premium per policy is low at only RM3 to RM6.

After obtaining the licence, Tune would start its retakaful business in July 2017. The company does not expect a spike-up in its overall cost for this because it only needs one additional syariah adviser for this new business.

However, we gather that the income contribution from this to Tune would also be negligible in the next one to two years, as we think that it would be selective in underwriting new businesses, especially corporate businesses, considering the risk of huge claims in the future.

The product bundling would help Tune record a quarter-on-quarter increase in net profit in 2QFY17. However, gross premium could still decline year-on-year in 2QFY17, due to the change in the switch to an “opt-in” function in July 2016. In view of this, we estimate that 2QFY17 net profit could potentially decline by around 50% due to weaker insurance premiums.

We are of the view that earnings growth would continue to be weak in 2QFY17 to 4QFY17, as our sense following the meeting is that the ongoing initiatives would not significantly drive premium growth in the near term.

As such, we cut our projected gross premium by 4.9% for FY17 to FY19, leading to a reduction of 9% to 10% in our FY17 to FY19 earnings per share forecasts.

Our dividend discount model-based TP is also cut from RM1.89 to RM1.71.

Although premium growth is expected to be uninspiring in the next one to two quarters, we continue to rate Tune as an “add” given the potential rerating catalysts for possible new tie-ups with other airlines, and potential mergers and acquisitions in Indonesia.

Downside risks to our call include a plunge in premiums and a spike in the claims ratio. — CIMB Research, June 19