Tune Protect’s 4Q17 net profit of RM8.4m (-49.5% yoy, -15.9% qoq) was below expectations. The weaker quarter had also dragged down the full year performance in 2017, resulting in a net profit of RM46m (- 42.5% yoy), which was 20% below our estimates. We had initially expected the group net claims ratio (mainly motors repairs cost) to continue improving in 4Q17 against 3Q17 but it had instead spiked up. Recovery in the air travel underwriting profit remains slow as the division has incurred high marketing expenses while revenues were not booked-in yet. We cut our 2018-19E earnings forecasts further and maintain our HOLD rating with a revised Price Target of RM0.99.

4Q17 Was a Negative Surprise – Claims and ME Ratio Spiked Up

Tune Protect saw a weak 4Q17 net profit of RM12.7m (-11.2% yoy, -2.1% qoq). 2017 results was below our expectations by more than 20%. Nonetheless, we believe that with the ongoing initiatives to address the challenges faced, Tune Protect will potentially see improved earnings from 2018E onwards. Meanwhile, the weaker 2017 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. RM5.2m (2016) vs. RM3.2m (2017).

Earnings Cut by 23-25%. Maintain HOLD, Revised PT at RM0.99

We trim our 2018E-19E earnings by 23-25% as we reduce our GWP growth from 5% to circa 2%-3%, while raise our assumption on claims ratio to 65% for the general insurance. Maintain HOLD on Tune, with a lower Price Target of RM0.99 (premised on a 1.35 2018 P/BV) from RM1.15. 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); iii) dynamic pricing (expected Aug-17); and iv) redirecting car repairs to nonfranchise panel workshops since Jul-17, may potentially boost topline growth and lower the claims cost going forward. Key downside risks include a sustained decline in its travel insurance segment and sticky motor claims ratio. Upside risks – substantially improved overall combined ratio.

Source: Affin Hwang Research - 1 Mar 2018