This article first appeared in The Edge Financial Daily, on June 10, 2016.

Tune Protect Group Bhd
(June 9, RM1.53)
Maintain buy with a higher target price (TP) of RM2.14: Although the share price of Tune Protect Group Bhd has risen precipitously since bottoming out in February, the group’s recent financial results demonstrated a much better performance than its current share price would suggest. While the stock is lagging behind its fundamental value, we believe it is starting to close the value gap.

We anticipate Tune’s bottom line to be bolstered by its travel segment. The group has continued to pull in an encouraging performance by the segment despite numerous events that had dampened appetite for travel.

Our analyst expects passenger traffic growth to come in at approximately 4.8% year-on-year (y-o-y) and 5% y-o-y for AirAsia Bhd and AirAsia X Bhd respectively. We are confident that the growth will spur more take-up of the group’s travel insurance coverage.

We see premium contributions for insurance policies sold via Air Arabia strengthening further, riding on strong passenger traffic growth in the Middle East market, forecast by the International Air Transport Association at 11.2% y-o-y in 2016.

The group’s sales growth will also be supported by new offline business-to-business with more collaborations with travel agents in the region. The group is expanding its database marketing to include Takaful products and regional cross-selling to bring in more commission income.

We believe the contributions will come in stronger than our earlier financial projections. We revise upwards our respective FY16 and FY17 earnings forecasts by 16% and 25%. We also take into account the recent improvement in net claims recognition by the Malaysian Motor Insurance Pool and cost savings from the rebalancing of its product portfolio.

We increase our TP to RM2.14 based on FY16 sum-of-parts valuation, indicating a relatively cheaper price-booking value (PBV) of three times, which is below its three-year historical PBV average of 3.6 times.

We believe that our valuation is justifiable given that the group has a dominant market share in local travel insurance, a healthy balance sheet  with a net cash position, and a strong double-digit return on equity. We continue to recommend “buy” on Tune. Downside risks include: a full liberalisation of motor tariffs next year posing an adverse impact on its top-line contribution, concerns about terrorism threats and ongoing economic uncertainties as potential headwinds to its travel insurance business, and a strain on its capital position in the event of higher insurance claims. — MIDF Research, June 9