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Author: Tan KW   |   Latest post: Sat, 21 Jul 2018, 01:06 PM


This is one company that might ride on the remarkable growth of AirAsia - Stanley Lim, CFA

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The story of AirAsia is almost like a fairy tale. Co-founders, Tan Sri Tony Fernandes and Datuk Kamarudin Meranun bought over a failing airline for a token sum of RM1.00. They then built it up to become one of the largest low-cost carriers in the world.

Today, AirAsia continues to grow aggressively. Its revenue has grown from RM2.6 billion in 2008 to close to RM7.0 billion at the end of 2016. The company has also launched multiple associate airlines in many countries outside of Malaysia and a new long-haul low-cost carrier, AirAsia X. Yet, the airline industry continues to be one of the hardest industries to be in. Warren Buffett has famously commented that airline stocks are a “death trap for investors” (Although he has recently changed his mind by investing in most of the major U.S. airlines).

Although AirAsia’s revenue has been growing quite consistently, its earnings are extremely volatile — they have swung between huge losses of more than RM470 million to a profit of over RM2.0 billion in the past eight years. This is because one of its main costs is fuel, where price is always volatile. Moreover, it is a business with extremely high capital expenditure; airlines have to buy a fleet of aircraft only to charge passengers a fee that’s competitive enough to take up seats.

The problem I had

What if we like the growth story of AirAsia but do not want to invest in the airline industry?

Is there a way to ride on the growth of AirAsia without the risk of investing in airlines?

I contemplated this issue in the past. I invested in AirAsia back in 2009 as I was looking to tap on its recovery after a terrible year in 2008. I have since sold my stake in AirAsia after its share price went up significantly.

I had mixed feelings when I sold it. This is because I was still very interested in the growth potential of the business but yet I was very uncomfortable with its high debt and the volatile nature of the airline business. Case in point: In its latest quarter, AirAsia had a net debt to equity ratio of about 96%!

The solution I found

After searching for a while, I I found the “solution” to my problem: Tune Protect Group Berhad.

Tune Protect Group is part of the Tune Group of companies. Tune Group is the parent company of AirAsia Berhad. Tune Protect is the insurance arm of the entire group. It is also listed on Bursa Malaysia and currently has a market capitalisation of about RM850 million. In fact, AirAsia is also one of the major shareholders of Tune Protect holding a 13.65% stake.

Shareholdings as at 21 July 2017. Source: Tune Protect Group

Basically, Tune Protect started out as the travel insurance provider for AirAsia. If you’ve ever bought a ticket from AirAsia before, you’d realize there’s an option to buy travel insurance together with your ticket. That travel insurance is most likely provided by Tune Protect.

This means that, indirectly, Tune Protect should be able to grow in tandem with the growth of AirAsia. This is because there will be a percentage of passengers who would also buy insurance when they purchase their air tickets. And as the number of passengers increases when AirAsia expands, the number of insurance policies sold through its website should increase as well. In a way, shareholders of Tune Protect would benefit from the growth from AirAsia without taking on the risk of its high debt and volatile business model.

The risks involved

This does not mean Tune Protect is a risk-free stock to own. It would just have a different set of risks compared to AirAsia.

For example, it’s important to know that Tune Protect has expanded its business beyond AirAsia. In 2016, only 37.3% of its net earned premiums came from the travel insurance segment. This is because the company holds general insurance licenses in Malaysia and Thailand. Thus, the company is now involved in other segments like motor insurance and fire insurance. As the company grows its general insurance business, its reliance and exposure to AirAsia’s growth would diminish.

On top of that, insurance underwriting profit depends on the company’s ability to price its policies conservatively. If the company is to be too aggressive in its pricing, it might suffer underwriting losses.

Lastly, there have been a number of management changes happening within Tune Protect over the last few years. It has seen three CEO changes since its initial public offering in 2013. There has not been much information regarding these top management changes but that is not a good sign for investors.

What about the business?

Even if we were to invest in Tune Protect Group to ride on the growth of AirAsia, it is important to make sure that the business fundamentals are good as well. Looking at Tune Protect’s growth over the past few years, it has been quite respectable.

Its revenue has grown at 23% per annum from 2012 to 2016. It recorded revenues of RM516.6 million in 2016.

Source: Annual Reports

Its profit has grown slightly slower at 17.8% per year over the same period to RM79.98 million in 2016.

Source: Annual Reports

The company also enjoy a relatively good return on equity over the past few years. In the past three years, its ROE ranged between 15.3% to 18.0%.

Source: Shareinvestor.com. 2012 data is before IPO.

As an insurance company, its debt level is also at a reasonable level. Its finance leverage stands at around 2.5 times in the last financial year. By comparison, United Overseas Insurance has a leverage ratio of around 1.8 in 2016.

Lastly, Tune Protect is trading around 12.2 times its trailing earnings at the moment. In terms of its book value, it has a price to book ratio of about 1.7 and provides shareholders with a dividend yield of 4.6%.

Source: Shareinvestor.com. No data available for 2012.

The fifth perspective

AirAsia has been one of the fastest growing companies in the region over the past decade. The company has grown from being an underdog to a giant in the aviation industry in Asia. However, the company is also operating in an extremely difficult industry; one that requires high capital expenditure and faces volatile operating costs.

Sometimes, a way for investors to tap into the growth of a fast-growing company, but not take on the huge risks associated with it, is by investing in some of its key suppliers. For AirAsia, Tune Protect is one such example. The company is a key supplier of travel insurance for the airline but doesn’t take on huge debt or huge capital requirements when AirAsia expands. Yet, no company is without risk. Tune Protect will have other risks that are related to its operations.

So the next time you find a high-growth company but you’re uncomfortable with its accompanying risks, look around and see if you can spot any adjacent businesses that might ride on coattails of its growth.



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Related Stocks

Chart Stock Name Last Change Volume 
AIRASIA 3.25 +0.02 (0.62%) 10,694,700 
TUNEPRO 0.955 -0.015 (1.55%) 621,600 

  valuegrowth likes this.
Alex™ i want to support, just that im held back after reading this

11/08/2017 10:30
Pavillion Who want to buy their insurance from 'stingy' image of Air Asia?
11/08/2017 10:44
supersaiyan3 Tune is a noob business, bet on people mistakenly click to sell.

People are more careful to click now, so business no prospect. Unless they find new ways to cheat people loh.
11/08/2017 10:45
Flintstones lmao. tuneprotect again. this guy ever know how to analyze insurance business? did he bought his cfa?
11/08/2017 11:11
paperplane lousy company I guess?? poor management?
11/08/2017 17:05
paperplane what is the CAR? capital, etc?
11/08/2017 17:05
paperplane Made a motor claim for an accident, the adjuster declared the car as total loss. And when i asked what's the claim approved, it turned out to be less than market value of the vehicle. I checked with other insurance company Alliance and Aig the value difference is 3k plus higher than what Tune is giving.When asked how can that be different they said it differs from insurance company. How is that possible when you say you follow market value?You cant just simply say figure and say that's the value of the vehicle. Wheres the data for it? Where are you getting it from? Nothing is justified!! Never use this insurance as a vehicle insurance!! They don't even deserve a star! Facebook made me choose atleast a star
11/08/2017 17:06
paperplane I must say that I am really disappointed in terms of using service of Tune Protect.
I sent all documents to make a claim about a month ago and since that I asked few times what is the progress of my claim. Unfortunately no one responded to my e-mails and it looks like I paid the insurance company that doesn't care about the customer. I don't recommend Tune Protect. Please use another insurance provider in the future
11/08/2017 17:06
paperplane poor claims service--->poor sales---->lesser premium----> lesser investment income to play with---->lesser capital, reserve etc---->share price drop.

this is a bad cycle......
11/08/2017 17:08
Flintstones Good one paper sifu. Tuneprotect have been going down hill since the korea md left.
11/08/2017 19:09
Flintstones Tuneprotect reminds me alot abt parkson. Both equally mismanaged companies
11/08/2017 19:10
Alex™ paper....u go see aeoncr FB one....also got complain....but still balance....got positive....and those negative
11/08/2017 19:12
Alex™ I think are quite negligible....for customer business just see FB nowadays.....quick snapshot whether company is gold or fish
11/08/2017 19:13
Junichiro I bought my new car 2 yrs back n the car company insured my car with Tune. When it came out for renewal, I went to Tune office (the signboard says Tune Insurance Bhd) n I found the staff there is not actually Tune's staff. They outsourced it to this firm which also sells insurance of other insurers. Then I got a shock. They asked me to go back to the car distributor to renew my insurance. I took the more easy way by going to an insurance company owned by a bank.

I do not hold any shares in Tune now, having sold all my holdings at abt 1.64 (whenever I noticed that whenever the directors giving notice to deal with their shareholdings, there would be huge sellers to bring the price down.
11/08/2017 19:46
BornToSpeculate No offense but really poor one-sided analysis from a so called CFA analyst. Why bother writing when it has so little content. Anyone can write this and you dont even need to understand the business.
11/08/2017 21:05
eyewitness Why did you selectively use data up to 2016 only, with 0 mention of 2017?
How about Q1/3/17 PAT plunged by 50% YoY. That's not relevant even to bring up?
11/08/2017 22:19
Jun Yu 在tunepro旅游保险的take up rate没有恢复的前提之下,tunepro的最大贡献部门,Travel Insurance的profit是不可能增长的。


AmInvest Research:
"The take-up rate for global travel insurance has since fallen to 11.9% in 1QFY17 from 13.0% in 4QFY16 and 15.0% in 3QFY16."

"To address the decline, the group will be implementing several initiatives in stages. It has already tied-up with AirAsia to bundle its travel insurance with the latter's fair packages under Value Pack, Premium Flex and Premium Flatbed in 2QFY17. On 1 June 2017, the group launched the bundling of its travel insurance with AirAsia's Premium Flex and Premium Flatbed packages. It plans to bundle its air travel insurance with AirAsia's Value Pack by the end of June 2017. Presently, the product bundling is only available for Malaysia and Thailand, the first and 2nd largest market respectively for travel insurance. By July and August 2017, this will be extended to all markets."

与TUNE保障进行会晤,但对公司前景不感乐观,主要是公司虽于5月17日起为亚洲航空(AIRASIA,5099,主板贸服组)Premium Flex、Premium Flatbed和Value Pack客户提供捆绑保险产品,可新措施料难在短期内带来显著正面贡献。

11/08/2017 22:59
Jun Yu Travel insurance margin is extremely high and General insurance margin is so 'general'...

Hence, the increase of revenue for General insurance cannot "tahan" the decrease of revenue for Travel insurance... resulted in profit drop gaogao
11/08/2017 23:00
Multibagger Agreed with you Jun Yu. The effect of opt in ruling has badly affected TuneProtect travel insurance . its other general insurance eg motor, I reckon the base has not reached critical mass to be competitive as insurance is dealing with probability and you need a sizable base to spread the risk. I will only add more if it starts to show improvement in travel insurance business.
12/08/2017 06:31
Koon Bee Skip..so many bad comment.
12/08/2017 07:52
Koon Bee Post removed. Why?
12/08/2017 07:53
Alex™ I will feel paise if ppl know I'm tune shareholder.....maybe will kena scold along as well
12/08/2017 08:46
greatful I came to see tunepro because the price drop from 1.4x to 1.00.
The EPS still in my acceptable range.
I will keep it in monitor list.
12/08/2017 08:58
supersaiyan3 paperplane, agree on what you said.

Its really not a serious business.
12/08/2017 09:09
Flintstones Aiya tis cfa analyst just wanna monetize his website mah. His content r shit btw
12/08/2017 09:34
BornToSpeculate Today's article.

12/08/2017 10:56
traderman greatful, the eps is dropping last few quarters ... tony and kamarul dispose a lot at 1.5 ...
12/08/2017 11:05
greatful Good news?
12/08/2017 12:09
smalltimer One plane casualty...n its gonna drop to 50sen
12/08/2017 21:54
greatful when at bottom, no one willing to dispose in fact collecting back. like what happened to airasia. May be 0.50 is the best entry? I do not know. But 1.00 is definitely not my preference price.
13/08/2017 21:24
10208932903053407 this counter will slump more :)
19/08/2017 11:16


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