Attractive valuations? We notice that MNRB is currently being traded at an annualised FY15 PER of <6.0x or 0.8x on latest quarter PBV. These valuations seem attractive as opposed to its peers (general and life insurers) whose PERs are in the range of 13x-20x (PBV: 1.0x-4.3x). Despite its relatively lower valuations, net profit of MNRB actually grew 26.1% and 38.5% in FY13 & FY14, while ROEs for these two financial years stood at 10.3% and 13.2% (vs. industry range of 13.5% and 29%), respectively. Some market observers reckon that this could be due to weaker investment sentiment post the recent unfortunate events in the aviation sector. However, as the Group has a fairly diversified portfolio, we believe claims incurred for such incidents should be manageable. While this could result in a relatively flat growth for FY15, the stock is still grossly under-valued with such undemanding valuations even if we factored in its below-than-industry ROE.

Leveraging on the industry growth. MNRB is an excellent proxy to leverage on the promising prospect of the country insurance industry due to low penetration rate amid a growing economy. Based on BNM’s latest published statistics, premium income from general insurance grew 6.8% YoY domestically and 9.2% YoY internationally as at end-June14. These growth rates are pretty much inline with 4-year CAGR of 8.1% and 9.1%, respectively, implying strong yet steady growth path that the industry has seen thus far. Besides, the domestic family Takaful and general Takaful have also been growing at a 4-year CAGR of 16.4% and 16.3%, respectively, reinforcing the bright prospect of the industry and MNRB to a certain extent. These growth rates translated into decent growth in MNRB’s gross earned premium. In FY14, MNRB’s gross premium grew 4.4%, or 6.3% on a calendarised basis.

Decent set of 1Q15 numbers. MNRB recorded a 3% YoY growth in gross earned premium in the recently reported 1Q15 results. However, due to higher premium ceded to other reinsurance players, the retention ratio was lower at 88.5% as opposed to 90.6% in 1Q14. Despite lower earnings contribution from insurance-related business, due to higher combined ratio of 94.6% (to net earned premium) vs. 93.7% in 1Q14, net profit of the Group was still able to register a YoY growth of 9.5% owing to much stronger investment related income, fee and commission income as well as other operating revenue. Collectively, these income streams grew 26.0% YoY and accounted for 14% of total income vis-à-vis 11% in 1Q14.

Squeezing efficiency going forward. While 1Q15’s top line growth seems moderate, we believe 2Q & 3Q could play catch up judging from the industry trend. Note that the 2H of the year normally contribute 66%-67% of the full-year insurance premium income based on BNM statistics. Besides, theoretically gross domestic premium growth of the group should trace the performance of the country real GDP growth. As such we believe that gross premium of the group should grow at a faster pace in the remaining quarters. Nonetheless, in our earnings estimates, we have imputed in a relatively flat growth in gross earned premium. We reckon that the Group could emphasise more on efficiency apart from growing its top-line. This is because the Group already has leading market position in domestic reinsurance business. Judging from its recent year performance, its combined ratio has improved to 94.6% in 1Q15 vis-à-vis 96.6%-97.2% in FY12-FY14. We believe the Group should be able to achieve a combined ratio of 95% in FY15 and gradually improve to 94.5% in the next 2 years. While we see volatile equity market conditions recently, we see no major concern in MNRB keeping its investment yield within historical performance as most of its investments are in the form of long-term debt securities. All told, we estimate MNRB to register net earnings of RM156.4m-RM161.8m (+0.3%-+3.4%) for FY15-FY16 with ROE expectations of 12.2%-11.5% (FY14: 13.2%). Note that the relatively flat growth in FY15 net profit was due to our conservative assumption in factoring potential claims incurred due to the unfortunate events in the aviation sector.

Financially solid as evident by an estimated technical reserve ratio of 165% as of end-Mar14 and favourable credit rating by rating agencies. For instance, Fitch Ratings reaffirmed Malaysian Re’s Insurer Financial Strength Rating (IFS) of ‘A’ with a Stable outlook. At the same time, A.M Best also reaffirmed Malaysian Re’s IFS rating of ‘A-’ and revised its outlook upwards from stable to positive.

Decent dividend payout. MNRB declared 13.0 sen, 24.0 sen and 16.5 sen (which had recently gone “ex” on 26 September 2014) for FY12, FY13 and FY14 respectively. These dividends represent payout ratios of 22.5%-45.4%. Going forward, we believe the group should be able to maintain at least a payout ratio of 20%, which will translate into net DPS of 15.0 sen-16.0 sen for FY15E-FY16E, implying a net yield of 3.4%-3.7%.

Trading Buy with a Target Price of RM4.60. We strongly believe that the stock is due for a re-rating in the near future. Should this expectation materialise, we believe both PER and PBV multiples should easily rerate up to their respective +1SD-level from its 3-year price multiples band, which are 6.2x and 0.64x respectively. Again, note that these price ratios are still lower than the industry average. Based on our FY16 EPS and BPS estimates of RM0.76 and RM6.93, respectively, we peg our fair value for MNRB at RM4.60, on a blended basis, representing >10% upside from here. TRADING BUY.

Source: Kenanga