INVESTMENT MERITS

MNRB has shown improved numbers since our last update with better profitability seen as a result of better claims ratio. That said, the exposure to riskier portfolio still have room for improvement, where the group is currently rationalising by means of removing the unprofitable overseas portfolio which might result in lower premium. That said, growth from Takaful should partly mitigate the shortfall. We assign a Notrated rating to the group with new TP of RM2.72.

What have changed since our last report updated on Mar 2015? The group registered disappointing results in both FY15 and FY16 (with NP down 11% in FY15 and recorded NL of RM40.5m in FY16). Main culprits were: (i) the slower growth momentum in its general insurance Gross Written Premium (GWP), (ii) abnormally higher claims from the overseas business (explosions at Port of Tianjin in China in FY16), and (iii) the exceptionally higher number of large domestic claims.

Better YoY financial performance thus far. At a glance back to its latest financial results, 9M17 total income (Net Earned Premiums-NEP and Other revenue) inched up by 2% as stronger NEP performance from the Takaful segment (+7%) was offset by a decline in premiums from the lion’s share reinsurance segment (-1%). Meanwhile at the PBT level, 9M17 PBT of RM145.2m (vs 9M16’s LBT of RM69m) was recorded with lower claims YTD (net claims ratio of 69%) as opposed to the exceptionally higher claims (net claims ratio of 82%) from Tianjin incident in China during 9M16.

Bonus issuance to improve liquidity. Note that the group has also completed its bonus issuance exercise in the past six months (on the basis of 1-for-2 existing MNRB Shares) to improve its trading liquidity. Alongside the improving results, the share price has since gained 31% as opposed to FBMKLCI which only gained by 6% over the same period.

Strategy to steer through the choppy sea. In its latest briefing, management noted that the instability of the international market could continue to loom on the global insurance and reinsurance market. Management have shared several strategies, which we concurred that could help the group steer through the challenging industry outlook. On the Reinsurance business (62% of total NEP in 9M17), the group is streamlining customer portfolios by minimising riskier portfolio exposure, particularly in high incidence regions. While we view that the premium from this segment could continue to go south, such decision of curbing high claim ratios from customers with high frequency claims could be supplementary by contributing a higher profitability for the group.

Meanwhile for the Takaful segment which will be the growth driver (from both General and Family Takaful), the group is spending more efforts (by ways of hiring key personnel on board, alongside the implementation of an agency transformation programme) in penetrating into the middle-income market given the view that a large propensity of this segment has little awareness on Takaful products. Note that the promotional initiatives into sub-urban areas in recent months have shown encouraging results to justify further resources being pooled there. Meanwhile, to curb the overall claims ratio, hedging policies are continually being reviewed to reduce claim exposure.

Not rated with a FV of RM2.72. Note that our last recommendation on the stock since 2015 based on FY16 forecasts (TB, TP of RM2.90 on exbonus) is already outdated and hence no longer valid. We introduce a new set of FY17E/FY18E NPs of RM62.4m/RM75.2m underpinned by 1- 2% growth on GWP and lower combined ratio of 103%. With that, we derived our new TP of RM2.72 based on PER/PBV ratios of 0.6x/11.4x which is the group’s 3-year average price multiple bands. As we see limited capital upside, we assign a Not-rated rating to the stock.

Other salient points
Detariffication of Motor and Fire insurance. Note that Phase 2 of the framework on phased liberalisation of Motor and Fire
Tariffs which will commence on 1st July 2017 provides for detarrification of the motor business. While management does not
elaborate much of the implications to the group, we believe the risk based capital framework in place coupled with the phased
implementation should minimise the intensity of competition among the insurers. Meanwhile from the pricing perspective, the
multi-layer approval for pricing deviation of >10% by BNM will also minimise margin cannibalisation.
 

Source: Kenanga Research - 20 Apr 2017