Period  3Q13 / 9M13

Actual vs. Expectations  The reported 9M13 net profit of RM149.1m was slightly below consensus estimate of RM205.7m, accounting for 72%.

 Against our earlier FY13 net profit forecast of RM231.6m, it only accounted for a mere 64%.

 The lower-than-expected results were due mainly to our earlier assumptions of: (i) lower reinsurance ratio and (ii) lower combined ratio (to net earned premium), which is not proven optimistic in the underlying tough operating environment - challenging with continuing uncertainties in the global economies and stiff competition in the insurance market.

Dividends  No dividend was proposed, as expected. The stock had paid 18 sen/share as dividend (vs. 15 sen in 9M12). However, due to our overly optimistic in FY13 & FY14 NDPS estimates of 104.3 sen and 115.1 sen, we are revising down our estimates to 75 sen and 86 sen, respectively, inline with our earnings downgrade (see the following sessions).

Key Results Highlights

9M13 vs. 9M12:  Net earned premium grew at a mere 4.5% YoY despite gross earned premium grew 7.4% due to higher Re-insurance Ratio of 41.2% from 39.6% in 9M13.

 Total income grew slightly faster at 5.7% owing to higher growth in investment income (+8.1%), which is mainly driven by dividend income from PBBANK (OP; TP: RM18.20).

 Nonetheless, discipline and prudency on risk selection and claims management have enabled the Group to grow at a faster rate. Its operating profit jumped 22.5% due to lower claims incurred ratio from 50.1% to 46.5%.

 Coupled with lower effective taxation of 19.6% (vs. 21.1% in 9M13), the net profit of the Group advanced 24.7% from RM119.5m in the previous corresponding financial year.

3Q13 vs. 2Q12:  QoQ, net premium earned was flat at approximately RM158.0m. However, total income managed to register a 5.8% growth due to final dividend income received from PBBANK during the quarter.

 Operating income was further boosted by lower: (i) Commission to Net Earned Premium Ratio of 20.1% (vs. 21.4% in 2Q13), (ii) Claims Incurred Ratio (43.5% vs. 2Q13), and (iii) Management Expense Ratio (19.0% vs. 20.8%). As a result operating income grew 14.9% QoQ to RM72.0m.

 Also, due to a much lower effective tax rate of 16.0% vs. 25.5%, the net profit grew 29.6% QoQ to RM60.4m. The lower taxation is owing to the dividend income. Should we exclude this income, the effective tax rate should be at 22.9%, which is closer to previous quarter taxation.

Outlook  Even as the Group recorded a lower-than-expected set of results, we believe the Group will able to see growth of 16%-17% in gross earned Premium tagging along with PBBANK’s loan growth of 12%-15%.

 Both fire and motor insurance businesses remain as the Group major growth driver. These 2 segments accounted for 59.5% of the total gross earned premium as at end-Sep13 and 70.2% to total net earned premium for the similar period of time.

 While we have revised (up) our assumptions on (i) Commission to Net Earned Premium Ratio, (ii) Claims Incurred Ratio and (iii) Management Expense Ratio to be more reflective of the recent results, we are still able to see a decent growth of 15.5%-16.7% in Operating Profit for the next 2 financial years.

Change to Forecasts  By applying a 2-year average effective tax rate of 22.4% for the next 2 financial years, we gathered now its net profit is estimated to grow by 16.2% in FY13 and 15.5% in FY14 (vs. +37.6% and +12.3% previously).

 All told, our FY13 net profit estimate is revised down 16% to RM194.0m vis-à-vis previous forecast of RM231.6m.

 Our FY14E net profit, on the other hand, is also lowered by 12% from RM255.4m to RM224.1m.

 Coupled with a lower dividend payout ratio assumption of 85% as compared to 90% previously, our FY13 and FY14 NDPS are re-estimated at 75.0 sen and 86.0 sen, respectively.

 Dividend payouts will still translate into a net yield of 4.9%-5.6%.

 We lower our dividend payout ratio assumption as we reckon that the group may need to conserve capital for a stronger balance sheet in order to achieve a higher premium growth.

Rating   Downgrade to MARKET PERFORM (from OUTPERFORM) as we see limited upside from here. However, we are reluctant to rate this stock an UNDERPERFORM as it is one of the very few Consistent Performers on Bursa.

Valuation  Based on an unchanged 15x target PER and rolling to FY14 numbers, the stock should be valued at RM15.20, representing a downside revision from RM16.10.

 We believe our target 15x PER is conservative given that the stock has been trading at 19.0x PER for the last 2 years.

 Our valuation also implies a FY14 PBV valuation of 2.4x, which coincidently is the 2-year average.

Risks  Lower premium underwritten, hence growth.

 Higher than expected combined ratio as well as effective tax rate.

Source: Kenanga