Missed expectation. After eight consecutive quarters of profits, 3Q15 results plunged once again into negative territory. Loss totalled RM20.1m, bringing 9M15 net profit down to RM50.5m. This lagged our expectation, accounting for a mere 32% of our FY15 forecast. The weaker-than-expected performance was brought about by large claims relating to the floods on the East Coast of Malaysia and possibly also the aviation tragedies involving local carriers.
YoY, 9M15 net profit fell mainly on lower NEP and higher expenses. Specifically, the -7.8% YoY drag on 9M15 net profit (NP) was due in part to declines reported in net earned premiums (NEP) to RM1.4b (-1.5% YoY) as gross earned premiums (GEP) stayed flat (-0.2% YoY)and the retention ratio slipped to 89.3% (-1.1ppts). Only the takaful segment (+3.6% YoY) managed a growth in GEP, whereas the reinsurance (-1.2% YoY) and retakaful (-54.6% YoY) segments recorded declines. Other revenues also registered a decline (-5.5% YoY) this 9M15. Consequently, total income waspushed downwards to RM1.61b (-1.9% YoY).
The decline was further exacerbated at the net profit level mainly on an increase in operating expenses with the expense ratio coming in higher at 34% (+1.5ppts YoY). Another impacting factor was a jumpin the effective tax rate to 38.9% (+6.1ppts YoY).
QoQ, 3Q15 went into the red on aviation and flood claims. On a QoQ basis, 3Q15 saw a net loss due in part to a decline in other revenue to RM40.2m (-22.7% QoQ). NEP, on the other hand, managed a 3.7% QoQ growth to RM495.1m. Hence, total income was propped back up to register a marginal 1.1% QoQ growth to RM535.3m.
Nevertheless, the gain turned into a loss at the net profit level given a large 12.3ppts QoQ increase in the net claims ratio to 75% on a few large claims relating to the recent floods in Kelantan, Terengganu and Pahang (Dec 2014 – Jan 2015) and possibly claims relating to Malaysia Airline MH370 and MH17 (early- and mid- 2014). The expense ratio was also higher to 35% (1.6ppts QoQ). Both of this elevated the Group’s combined ratio by a whopping 13.9ppts QoQ to 110% causing 3Q15 to register the Group’s first earnings decline in two years.
Increased regulation to spur JV/M&A activities? Moving forward, uncertainty looms on: (i) how the Group will respond to the impending detariffication of the motor and fire takaful (and insurance) scheduled for 2016, and (ii) the Financial Services Act 2013 and the Islamic Financial Services Act 2013 (effective 30 June 2013) requirement for composite takaful (and insurance) players to split their licenses by 2018.While the jury is still out on whether the former will be beneficial or not to insurance players, the latter will likely result in higher costs (in the setting up of separate units with separate capital requirements). Hence, there may be pressureon the Group to consider a joint-venture or merger and acquisition, which inturn could be a positive rerating catalyst.
GST could slightly dampen growth but unlikely to be material. There is also the goods and services tax (GST) which is scheduled to take effect in a few days’ time (on 1 Apr 2015). The GST could possibly dampen sentiment and result in a pull-back in spending, which may impacton insurance sales as the majority of insurance products will be subjected to GST. However, we are expecting premiums to grow given a greater awareness of the importance of insurance, especially with the cost of living going up. Furthermore, fire and motor insurance are compulsory.
Trading buy with a fair value of RM4.35. In short, FY15 was fraught with a couple of notable disasters which had impacted on the Group’s performance. Moving into FY16, we are anticipating a rebound in net profits with a more sustainable claims ratio of <70%. Having said that,premiums growth could be slightly muted owing to the implementation of the GST. In light of this, we cut our FY15/16 forecasts by 42/7%, leaving us with a lower fair value (FV) of RM4.35 (from RM4.60). Our PB/PE ratios remains unchanged at 0.6/6.2x which are 1SD above the Group’s 3-year price multiple bands. Nevertheless, these price ratios are still much lower than the industry average (3.1/17.4x). In this respect, we reiterate our TRADING BUY call on the counter.
Source: Kenanga Research - 26 Mar 2015
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