Tune Ins Holdings Bhd
(Nov 18, RM1.97)
Maintain “buy” with a target price (TP) of RM3: Nine-month financial year 2014 (9MFY14) net profit was below expectations (+6% growth), at 63% of our and consensus estimates. Online travel insurance charted RM41 million in profit after tax (PAT). However, travel policies issued (at 5.8 million policies) had flattish growth year-on-year (y-o-y) despite approximately 15% passenger growth as per our Nov 12 earnings preview titled “Tune Ins: Rejuvenating Its Multichannel Growth”.

Another culprit for the lower-than-expected bottom line was the non-online Tune Insurance Malaysia Bhd (TIMB) unit. Despite its stronger premium growth, TIMB posted a mere 5% underwriting margin amid two large fire claims, new business strains and higher-than-budgeted medical claims from two accounts. The tax benefit from the Malaysian Motor Insurance Pool’s tax relief was not enough to smoothen the impact (a provision of RM 5 million was made year-to-date). All in, the combined ratio surged by 650 basis points to 79.7% vs 9MFY13’s 73.2%. We estimate that 9M profit margin for travel insurance remained relatively intact at about 50%.

We find comfort in knowing that Tune Ins’ ventures are now fully contributing to profits. Quarter-on-quarter, contribution from its Thai associate surged by RM2 million. The Air Arabia Middle East JV generated a profit of RM130,000 in the quarter.

We lower our FY14 earnings forecast by 6% to take into account the higher combined ratio (we adjusted our net claims ratio higher to 40% from 38%). We make no changes to our FY15 forecast at this juncture, pending management’s briefing on Nov 18. The fourth quarter (4Q) is typically a strong quarter for the group due to higher travel demand, and the possible release of reserves for certain insurance premium in the first half of FY14. The group surpassed our estimates in its 4QFY13 results last year.

Maintain “buy” and RM3 TP, pegged to a 24 times FY15F price-earnings ratio (PER) (at a premium to sector valuations of 14 times to 20 times), as it is a growth stock with valuations supported by a swift expansion and more partnerships (Air Arabia, Osotspa Co Ltd Insurance and Cebu Pacific Air).

We believe the high combined ratio in 3QFY14 results was caused by lumpy loss items that are merely temporary setbacks and should not hamper the stock’s long-term prospects.

Diversification away from AirAsia (TP: RM2.73) is pivotal to supporting our call. — AllianceDBS Research, Nov 18

This article first appeared in The Edge Financial Daily, on November 19, 2014.