Tune Protect’s 3Q17 net profit of RM12.7m (-11% yoy, 2% qoq) was within our and consensus expectations. Sequentially, the improved 3Q17 results was due to a decline in the group net claims ratio from 47.5% (2Q17) to 40.7% (3Q17) which was attributable to lower motor repairs cost. Recovery in the underwriting profit of the travel segment remains slow as the division has incurred high marketing expenses while revenues were not booked-in yet. As upside to our Price Target of RM1.15 has narrowed, we downgrade Tune Protect from BUY to HOLD.

3Q17 Shows Sign of Stabilization in Net Earnings

Tune Protect reported a 3Q17 net profit of RM12.7m (-11.2% yoy, -2.1% qoq). We note that the declining net earnings trend is stabilizing though cumulative 9M17 net profit actually declined by 40.6% yoy. The weaker 9M17 performance was affected by: i) higher motor claims liabilities (as car repairs were being directed to the expensive franchise workshops before initiatives were taken to mitigate the high costs); ii) the continued adverse effects from the “Opt-in” regulatory changes to its travel segment; and iii) partially distorted by a one-off release of MMIP reserves last year, i.e. RM10m (9M16) vs. RM6m (9M17). Results were within our expectations and we believe that the Tune Protect group will continue to deliver better earnings in 4Q17, of which is also seasonally strong due to the year end travel period.

Initiatives to Address Operational Issues Bear Fruit in 3Q17

The 3Q17 air travel insurance take-up rate had improved to 14.8% (in-line with management’s target) vs. 9.8% in 2Q17 as a result of recent initiatives launched such as: i) product bundling for Premium Flex and Premium Flatbed for Malaysia and Thailand (launched end-May-17); ii) product bundling for Value Pack in all markets (launched Jul-17); and iii) dynamic pricing (expected Aug-17). Nonetheless, the shortcoming of these ‘bundled travel policies’ is that they command significantly lesser premium (~RM3) vis-a-vis Tune’s regular travel policy pricing (~RM20). Tune Protect Malaysia, which had started redirecting car repairs to non-franchise panel workshops since Jul-17, saw a lower net claims ratio of 40.7% in 3Q17 vs. 47.5% in 2Q17.

Source: Affin Hwang Research - 22 Nov 2017