Investment Highlights

• We are upgrading our call on Tune Protect Group (TPG) from HOLD to BUY with a higher fair FV of RM1.10/share (previously RM1.00/share) after rolling forward our valuation to FY19, pegging the stock to an unchanged forward PB of 1.4x. The stock is now trading at an undemanding valuation of 0.9x to our FY19 BV/share estimate considering that it is still generating positive earnings with a decent ROE.

• We see value emerging for the stock. Although the group’s earnings are still lower compared the quarters before the impact of Mavcom’s policy, we are seeing a recovery in the travel insurance business while the underwriting performance for its general insurance business has improved in 1QFY18. We make no changes to our estimates for now as this is only the first quarter’s results.

• TPG reported a stronger core earnings (PATAMI) of RM17.0mil in 1QFY18 (+38.8%YoY). This was contributed by a higher topline growth from the recovery of the group’s travel insurance business as well as a growth in motor premiums. Also, 1QFY18 saw an improved underwriting profit of its general insurance business by 88.1%YoY to RM7.1mil. This was due to an improvement in the collection of insurance receivables resulting in lower provision of doubtful debts, time-barred claims on inward treaties to the amount of RM2.5mil as well as an improvement in claims processing. The claims ratio of 35.5% in 1QFY18 was lower compared to 41.4% in 1QFY17. Meanwhile, management expense ratio declined to 33.3%. With a higher commission expense, commission ratio rose to 12.1% in 1QFY18. The combined ratio in 1QFY18 improved to 80.8% (1QFY17: 87.9%). This was much lower than our expectation of 92.0% for FY18. Nevertheless, we maintain our combined ratio estimate for now. The recovery of legacy claims as seen in 1QFY18 may not necessarily be repeated in the subsequent quarters.

• Earnings for 1QFY18 were within expectations, accounting for 30.2% of our and 28.2% of consensus estimates respectively. Its wholly-owned subsidiary, Tune Protect Re (TPR) recorded an improved profit after tax of 3.9%YoY to RM12mil in 1QFY18. TPR’s 1QFY18’s GWP grew 11.1%YoY riding on AirAsia. This was supported by the bundling of its travel insurance with AirAsia packages and its initiative to implement dynamic pricing. Contributing to TPR profit was also lower management expenses with a decline in marketing spend. We understand that the take-up rate of travel insurance was higher in 1QFY18 vs. 4QFY17 and 3QFY17.

1QFY18 saw a vast improvement in the travel insurance policies issued by 81.9%YoY to RM3mil. Growth in GWP for travel insurance by digital channels (13.0%YoY) outpaced that of the nondigital channels (3.7%YoY). The group has tied up with a fifth airline partner, Kuwait-based Wataniya Airways (5-year agreement), a low-cost carrier that flies to 10 countries. This partnership is likely to go live in 2HFY18. Meanwhile, its partnership with Cambodia Angkor Air has gone live in March 2018.

Profit after tax of its subsidiary operating the general insurance business, Tune Protect Malaysia (TPM) grew 20.3%YoY in 1QFY18 supported by stronger underwriting performance as aforementioned. We understand that for motor claims, repairs sent to franchise panels have declined from 95% to 85% while the group saw an increase in repair works done by non-panel workshops which are less costly and hence benefiting in the terms of lower claims.

TPM's GWP rose by 4.2%YoY, underpinned by growth in motor, personal accident and travel insurance. Nevertheless, its NEP fell by 9.5%YoY due to a higher quota share for motor insurance (ceding out a higher portion of its motor premiums to reinsurers). The group is now a first panel insurer for Fomema’s newly-launched online portal for foreign worker’s insurance. We expect this to improve its underwriting profit of its general insurance with low claims for foreign worker’s insurance.

Share of profit from its associate, operating the general insurance business in Thailand and JV (Tune Protect EMEIA) was also higher on a year-onyear basis. The former’s higher profits were due to improvement in premium from travel insurance and lower claims while the latter was due to growth in the business-to-business (B2B) segment.

On the fintech space, the group’s investment in Insurtech, based in the UK with the intention of bringing the latter’s experience and technology to ASEAN, has received the necessary regulatory and board approvals. It is in the progress of signing shareholders’ agreement. The completion of this is expected to be announced in 2QFY18.

As to the other initiatives, the group has also launched its retakaful travel insurance offerings in the Middle East.

Source: AmInvest Research - 28 May 2018