Period  1Q14/3M14

Actual vs. Expectations The reported 3M14 net profit of RM50.6m is pretty much within our and consensus estimates of RM224.0 and RM221.3m, accounting for 22.6% and 22.9% respectively. Note that 1H has always been weaker as opposed to 2H.

Dividends  As expected, no dividend is declared in 1Q.

Key Results Highlights

3M14 vs. 3M13

 YoY, the Group’s revenue gained 7.5% to RM277.8m compared toRM258.5m in 1Q13. The increase was in-line with the 8.1% growth in gross earned premium (to RM251.6m) and 20.0% growth in commission income (to RM25.0m). These reflect the strong general steady growth in its general insurance business. The growth in gross earned insurance was driven by (i) 35.2% growth in Marine, Aviation & Transit sector and (ii) 15.6% growth in fire insurance. These 2 segments accounted for 11.6% and 31.8% of total gross earned premium respectively. As for motor and other miscellaneous insurance activities, there were pretty flat and accounted for 25.3% and 31.4% of total gross earned premium respectively.

 The growth of net earned premium was, however, much lower at 0.8% owing to a higher reinsurance ratio of 46% (vs. 1Q13 and our expectation of 42.1% and 40.3%). We suppose such a higher ratio was due mainly to a high reinsurance ratio in Marine, Aviation & Transit sector of 86.6%.

 Nonetheless, the Group still able to register much stronger bottomlines growth. PBT and net profit grew 22.7% and 20.1%, respectively. We understand that the better bottom-line performance was attributed to lower claims incurred ratio of 50.8% (to net earned premium) vis-àvis the ratio of 53.6% in 1Q13. Besides, the well-controlled commission and management expenses that merely grew 2.0% and 3.2% were also major contributing factors for higher profitability.

1Q14 vs. 4Q13

 QoQ, revenue of the Group declined 5.7% from RM297.6m 4Q13. This was inline with the decline in gross and net earned premium of 11.7% and 19.7%. This is not a surprise as seasonally, 1H has always been weaker in contrast to 2H.

 However, total income only declined 6.6% QoQ as we saw a strong QoQ growth of >100% in investment income as the group received dividend income from PBBANK in late-Feb14.

 However, the benefit of strong QoQ growth of 17.7% in commission income was offset by higher commission expenses of 12.4% during the quarter. Coupled with a higher claims incurred ratio of 50.8% (to net earned premium) vs. 42.6% in 4Q13, PBT declined 12.1% QoQ.

 Nonetheless, the net profit declined at a slower rate at 3.5% QoQ thanks to lower effective tax rate of 19.3% vs. 26.5% in 4Q13.

Outlook  Our view remains unchanged. We believe the Group will focus on building its agency network and continue to leverage on their partnership with PBBANK by using banassurance to expand their insurance business apart from growing its broking and global partnership business.

 We also believe its profitability to grow at a mid-teen growth rate, which is inline with growth in net earned premium. Consumer or household segments such as fire and motor insurance will still be the key growth driver.

Changes to Forecasts

 No change in our earnings estimates. We maintain our FY14 and FY15 net earnings estimates of RM224.0m and RM251.5m, respectively.

Rating Due to a potential Total Return of 18% including a c.5% dividend yield, we are upgrading our call from MARKET

PERFORM to OUTPERFORM.

Valuation  We maintain our Target Price to RM18.75, representing an 18.5x FY14 PER and FY14 PBV of 2.5x.

 We believe such valuation is not excessive as the stock has been trading at ~19x PER for the last 3 years.

Risks  Lower premium underwritten, hence growth.

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

Source: Kenanga