This article first appeared in The Edge Financial Daily on November 19, 2018

Tune Protect Group Bhd
(Nov 16, 66 sen)
Maintain hold with a lower target price (TP) of 75 sen: Although Tune Protect Group Bhd’s accumulative net profit for the first nine months of financial year 2018 (9MFY18) ended Sept 30, 2018 only accounted for 66% of our full-year forecast and 65% of Bloomberg consensus estimates, we deem it as being in line with expectations in anticipation of a stronger net profit in its fourth quarter of FY18 (4QFY18). This is because 4Q is seasonally the strongest quarter for Tune as the pickup in travelling activities towards year end will benefit its travel insurance business.

Tune’s net profit rose only 2.1% year-on-year (y-o-y) in 9MFY18, dragged down by the 5.8% y-o-y decline in the profit after tax (PAT) of its travel insurance business. Conversely, its general insurance’s PAT increased 12.7% y-o-y in 9MFY18; we believe this was mainly due to a lower claims ratio.

Gross written premium for its travel insurance business increased 6.3% y-o-y in 9MFY18. However, the unit’s 9MFY18 PAT fell 5.8% y-o-y due to higher management expenses, which pushed up travel insurance business’ combined (claims plus cost) ratio from 59.6% in 9MFY17 to 64.4% in 9MFY18.

We retain our FY18 earnings per share (EPS) forecast but cut our FY19 and FY20 EPS forecasts by 2.7% as we increase the assumed tax rate from 10% to 12%. This is because Budget 2019 states that Labuan’s tax ceiling of RM20,000 will be removed in 2019.

As such, the profit from Tune’s travel insurance entity (which accounts for about 60% of its net profit) in Labuan will be subject to a tax rate of 3%, instead of a maximum of only RM20,000, before 2019.

For our dividend discount model (DDM), we update the beta from 1.1 to 1.9. This, together with EPS forecast cuts, lowers our DDM-based TP from 93 sen to 75 sen, despite the rollover of our valuation to end-2019 forecast.

We see low profit growth visibility for Tune’s travel insurance business in 2019, but we are optimistic about the expansion of its general insurance profit, as reflected by the strong expansion in 9MFY18. As such, we continue to rate Tune Protect as a “hold”. The upside or downside risks for our call are a pickup or a slowdown in its premium growth. — CGSCIMB Research, Nov 16