This article first appeared in The Edge Financial Daily on March 3, 2020

Tune Protect Group Bhd
(March 2, 42 sen)
Downgrade to neutral with a lower target price of 42 sen: Tune Protect Group Bhd’s (TPG) normalised earnings for the fourth quarter ended Dec 31, 2019 (4QFY19) decreased by 21.8% year-on-year (y-o-y) to RM10.6 million. Cumulatively, the group’s FY19 normalised earnings grew by 6.4% y-o-y to RM48.3 million. However, this came in below both our and consensus expectations, accounting for 87.2% and 87.4% of the full-year FY19 earnings estimates respectively. This was mainly due to lower-than-expected operating revenue and net earned premium (NEP).

On a cumulative basis, the group’s FY19 gross written premium and operating revenue continue

to decline by 10.6% y-o-y and 11.5% y-o-y to RM463.9 million and RM500.8 million respectively. This led to the group’s NEP to drop 12.6% y-o-y to RM469.3 million which was contributed by the fall in NEP of both Tune Protect Re Ltd (-16.7% y-o-y) and Tune Insurance Malaysia Bhd (TIM) (-11.9% y-o-y).

This was mainly attributable to the group’s portfolio restructuring at its general insurance arm, TIM, where it plans to gradually reduce the reliance on the high-premium pricing of motor portfolio towards more profitable lower-premium non-motor portfolio. Moving forward, we expect the top line to trend downward due to the potential business loss from the AirAsia segment in FY20.

To recall, note that the trend of underwriting profit generally follows that of the combined ratio. Even though the net commission and management expenses have improved (-5.8% y-o-y and -10.8% y-o-y to -RM40.0 million and -RM120.1 million respectively), it was not sufficient to make up for the fall in NEP.

As a result, the net commission ratio and management expenses ratio have deteriorated by 1.3 percentage points (ppts) y-o-y and 1.6ppts y-o-y to 15.7% and 47.2% respectively. On the contrary, the net claim ratio improved slightly (-1.9ppts y-o-y) to 32.3% as driven by the lower net claims of RM82.4 million (-18.4% y-o-y). Ultimately, the group’s combined ratio worsened marginally by 1.1ppts y-o-y to 95.2% which has caused the underwriting profits to plunge 29.6% y-o-y to RM12.2 million. Moreover, we expect the anticipated lower business activities from its most profitable travel insurance segment (AirAsia) to put downward pressure on its underwriting profit.

In view of the tough operating environment, we are revising downward our normalised earnings forecast for FY20 and FY21 to RM45.9 million and 49.1 million respectively. This is to take into account the contraction in NEP due to portfolio restructuring and tough operating environment as well as impact from Covid-19. Note that we are introducing our new set of earnings forecast for FY22 as well. — MIDF Research, March 2