Tune Protect’s 1Q17 net profit of RM11.9m came broadly in line with our estimate but underperformed consensus expectations. The continued adverse effect from regulatory changes, higher claims and lower investment income contributed to the disappointing results. We expect a negative pullback in the share price, and reiterate our BUY rating with an unchanged TP of RM1.57.

1Q17 Within Expectations But Below Consensus

1Q17 net profit of RM11.9m (-47.2% yoy, -27.9% qoq) came in at 16.1% and 13.4% of our and the consensus estimates. While we have expected a weaker 1H17, the results were nonetheless underwhelming due to the continued adverse effect from the “Opt in” regulatory changes to its travel segment, higher claims from the motor franchise business and lower investment income. These are, however, partially offset by a one-off release of MMIP reserves of RM4.7m.

All Is Not Lost

As expected, Tune Protect’s travel segment continued to be adversely hit by the “Opt in” regulatory changes (Fig 3). However, we note that the decline in number of policies issued has stabilised during the quarter (Fig 4) while the company will start the travel insurance bundling for AirAsia’s selected customer segments such as the Premium Flex, Premium Flatbed, etc. starting end-May. Moreover, we note that the customer pool for its partner airlines is still expanding at a healthy pace (Fig 5) and this should eventually translate to better travel policy sales. Meanwhile, for the general insurance segment, we understand that the company plans to manage its claims costs through better workshop arrangements.

AirAsia Collaboration a Minor Boost

Tune Protect has announced a collaboration with AirAsia for further data integration between the two companies, which would allow Tune Protect to leverage on AirAsia’s data and digital team to digitise its insurance operations and improve the customer experience. While we note that it is unlikely to materially impact the Tune Protect’s financials in the short term, we are nevertheless positive on the move which will further strengthen their working relationship and cross-selling capabilities.

Net Profit Could Bottom in 2Q17

Despite forecasting a potentially better travel segment performance and lower claims from the general insurance segment, we are expecting Tune Protect’s net profit to bottom in 2Q17 in the absence of the release in actuarial reserves, before a sequential rebound in the coming quarters. We have already factored in the RM5m release of actuarial reserves and a weaker 1H17 and therefore make no changes to our forecasts.

Reiterate BUY With Unchanged TP

The share price has surged by 12.4% in the past two trading days, possibly due to the announcement of the collaboration with AirAsia. A negative pullback in the share price is possible, however, in reaction to the weak 1Q17 results. We reiterate our BUY recommendation with an unchanged TP of RM1.57 (based on 2.03x 2018 P/BV).

Key Risks

The key downside risks include a sustained decline in its travel insurance segment and a higher claims ratio.

Source: Affin Hwang Research - 23 May 2017