FY17 CNP is in line, so was the YTD declared DPS of 72.0 sen. However, the 1-for-5 bonus issue was a positive surprise. Although the detariffication of Motor and Fire insurance is intensifying competition among the insurers, we are comforted by the group’s strategies in embracing the new trend. Post updates, we tweaked our FY18E CNP by +2% while introducing FY19E CNP of RM360.7m (+8%). Maintain MP with a higher TP of RM18.60.

Within expectations. The group reported 4Q17 core net profit (NP) of RM83.0m (-10% QoQ; +2% YoY), bringing FY17 CNP to RM310.8m (+8%) which made up 101% of both our/consensus’ full-year estimates. As expected, a second interim DPS of 45.0 sen was also declared, bringing YTD total DPS to 72.0 sen. Additionally, the group has also proposed for a 1-for-5 bonus issue of up to 66.4m bonus shares, expected to be completed in 2Q18.

YoY, FY17 revenue increased by 7%, driven by the higher gross earned premium (+7%) seen in the general insurance segment. Decent growths in lion’s share contributor- Fire insurance (+16%) as well as Miscellaneous insurance (+9%) made up for the shortfall in Motor (-3%) as well as Marine, Aviation and Transit (-18%) insurance segments. Note that the drastic drop in Marine, Aviation and Transit insurance segment continued to be dragged by the slower Oil & Gas activities. At the operating profit level, while headline EBIT dropped by 22% on the absence of PBBANK share sales gain this year (amounted RM150.4m back then), core EBIT in fact improved by 9%, underpinned by stable claims incurred ratio of 38.5% (+0.2ppts). While net commission ratio ticked up by 0.2ppts to 5.2%, lower management expense (-0.4%, to 20.9%) stabilised the total combined ratio at 64.7% (+0.1ppts).

On a QoQ basis, while total income dropped by 11% on normalisation from the seasonally strongest 3Q, PBT dropped by a lower quantum of 4%. This was helped by a lower combined ratio of 59.6% (-4.7ppts) thanks to a much lower claims incurred ratio of 34.6% (-5.7%) on higher underwriting activities in lower-risk Fire portfolio. However, at the bottom-line level, CNP mimicked the quantum of normalisation at the total income level (-10% to RM83.0m), on normalised effective tax rate of 25.0% (vis-à-vis 19.9%).

Sheltered from the industry’s liberalisation. Note that Phase 2 of the framework on phased liberalisation of Motor and Fire Tariffs (whereby motor insurance for comprehensive cover and third party fire and theft will be detariffed) has commenced from 1st July 2017 onwards. While our concerns are on the undercutting of premium pricing that could induce greater competition, we understand that there are in fact not much of premiums revision seen thus far among the new motor insurance products, thanks to the risk-based capital framework in place as well as the already thin margins on motor insurance. Another plus points that are sheltering the group from the stagnating motor insurance is its limited portfolio exposure which contributes 21% of the group’s FY17 gross written premiums (GWP), vis-à-vis other big players that have >50% exposure as well as the niche focus in the comprehensive and private car giving better experience ratings.

Maintain MARKET PERFORM with higher cum/ex TP of RM18.60/RM15.50 (from RM18.10/RM15.10). Our FY18E CNP has been tweaked by +2% for house-keeping purposes. We also introduce our FY19E CNP of RM360.7m (+8%) on: (i) healthy GWP of 10% which is in line with its historical trend since 2015 (driven by the lion’s share Fire segment, on gross loans growth assumption of 6% in PBBANK’s mortgage) as well as stable combined ratio of 62.9%. All in, our TP has been increased to RM18.60 (from RM18.10) with an unchanged blended FY18E PER/PBV ratio of 19.5x/2.9x (both based on LPI’s +1SD above its 3-year PER and PBV). Maintain MARKET PERFORM.

Source: Kenanga Research - 11 Jan 2018