This article first appeared in Corporate, The Edge Malaysia Weekly, on July 11 - 17, 2016.
WHEN Tune Protect Group Bhd was going for listing in early 2013, it was perceived to be the proxy for AirAsia Bhd’s passenger growth because it has an exclusive partnership with the low-cost carrier (LCC) to sell travel insurance to its passengers.
While Tune Protect may not be a monopoly, it certainly has a captive market. But judging by its share price performance now, the market seems to have forgotten this.
AirAsia’s share price has at least doubled since the start of the year, mainly due to more travellers flying with the LCC as well as lower jet fuel prices.
According to its key operating statistics for the first quarter ended March 31, the airline’s Malaysian operations saw an increase of 17% year on year in the number of passengers carried, with a seat load factor of 85% compared with 75% a year ago. Its revenue per available seat kilometre also increased 17% to 16.88 sen.
The seat load factor in its Thai, Indonesian and Philippine operations also improved during the quarter.
The carrier expects to see continued strong demand in the second quarter of this year, with an average load factor forecast at 88% for its Malaysian operations.
“We remain positive about the outlook for AirAsia Malaysia for the remaining quarters of 2016 as we continue to observe strong demand across most sectors, favourable fuel prices and a favourable foreign exchange for major Asian currencies against the US dollar compared to 4Q2015,” AirAsia says in its quarterly financial statement.
An increase in the number of passengers for the LCC should translate into more travel insurance sold for Tune Protect which, in turn, should lead to stronger earnings and more interest in the counter.
However, this does not appear to be the case.
While AirAsia’s share price has gained slightly more than 100% since the start of the year — from RM1.27 to RM2.57 — Tune Protect has only increased about 16.8%, from RM1.25 to RM1.46, over the same period.
Looking at the share price of both companies over a one-year period, AirAsia has more than tripled from a low of 77 sen on Aug 26 last year while Tune Protect has only risen 36.4% from a 52-week low of RM1.07.
Tune Protect has been trying to change public perception that it is just a travel insurance provider through an aggressive marketing campaign of its other general insurance product offerings. However, its travel insurance segment still accounts for the bulk of its net profit.
The company’s advantage lies in the exclusive partnership. According to its latest annual report, about 90% of the total sales of its travel insurance segment is derived from this partnership with AirAsia.
The remaining 10% comes from its partnerships with Malayan Insurance Co Inc for Cebu Pacific Air in the Philippines, Air Arabia in United Arab Emirates and a number of insurance underwriters as well as travel-related agencies in Asean, Europe, the Middle East and Africa.
Tune Protect’s largest shareholders are Tan Sri Tony Fernandes and Datuk Kamarudin Meranun — through their shareholding in AirAsia and Tune Group Sdn Bhd — with 30.29% equity interest.
Outgoing CEO Junior Cho said in a previous interview that one in four people who purchase an AirAsia ticket will also opt for travel insurance from Tune Protect. He added that the travel insurance take-up rate tends to be higher when people travel further.
After Cho’s departure, the CEO position will be filled by Razman Hafidz Abu Zarim, the current chairman of Tune Protect, pending regulatory approval.
In terms of earnings, the company has seen a marked improvement. Its net profit for the first quarter ended March 31 jumped 37.3% to RM22.63 million from RM16.48 million the year before. This comes on the back of higher operating revenue at RM129.54 million, up 16.4% from RM111.25 million previously. Net earned premiums increased 25.2% to RM82.64 million from RM65.98 million.
“Looking ahead, the group remains confident that we will see continued growth for the remainder of the year. Global travel will benefit from continued growth with the recent full ratification of Asean Open Skies, which will increase capacity and new routes for passengers, coupled with continued efforts by governments to implement visa waivers.
“We anticipate that our general insurance entities will continue to outpace the industry average with new product innovation and expanded channel partnerships,” Tune Protect says in its financial statement.
As at March 31, the company had retained earnings of RM233.63 million, implying that it has the financial muscle to invest further in its business. One expansion target that seems to have eluded the insurer over the last few years is an insurance licence in Indonesia.
An opportunity to acquire an Indonesian insurer last year slipped through its fingers when “certain conditions precedent could not be met”. Tune Protect, however, maintains that the Indonesian market is important to the company, being the third largest contributor to its travel business, and that it is still keen to establish an underwriting presence there.
The insurer declared a dividend of five sen per share for the financial year ended Dec 31, 2015, indicating a yield of 3.4%, based on the share price of RM1.46 last Tuesday.
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