1Q18 CNP came in line, so was the absence of DPS. Post updates, we tweaked our FY18E/FY19E CNP by -3% each for house-keeping purposes. Though 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. With a rollover to FY19E valuation, our TP is increased to RM16.30. Maintain MP.

Within expectations. The group reported 1Q18 core net profit (NP) of RM72.5m (-13% QoQ; +7% YoY), which made up 22% both of our/ consensus’ full-year estimates, respectively. Absence of DPS is as expected. Additionally in the quarter, the group had also completed the 1-for-5 bonus issue exercise which resulted in its number of ordinary shares increasing to 398.4m from 331.986m.

YoY, 1Q18 revenue increased by 10%, driven by the higher gross earned premium (+10%) in the general insurance segment. Note that decent growth in lion’s share contributor- Fire insurance (+14%) as well as Miscellaneous insurance (+12%) made up for the shortfall in flat Motor insurance segment. At the operating profit level, however, EBIT grew by a narrower quantum of 3% on higher combined ratio predominantly driven by higher claims incurred ratio (CIR) of 47.1% (vs. 39.8%); despite the lower management expense ratio (-2.9ppts). Note that higher motor claims were observed during 1Q18 alongside the absence of “incurred but not reported” claims release from Malaysia Motor Insurance Pool, hence poorer claims experience. However, its CIR should normalise back to the low-40% level for the remaining quarters.

On QoQ basis, while total income improved by 4% (with seasonally stronger investment income of +87%, offsetting seasonally lower net earned premium), EBIT dropped by 18% on higher combined ratio of 73.2% (+13.6ppts). Main culprit again was the higher claims incurred ratio of 47.1% (+12.5ppts) from Motor segment during 1Q18.

Sheltered from the industry’s liberalisation. Phase 2 of the framework on phased liberalisation of Motor and Fire Tariffs (where motor insurance for comprehensive cover and third-party fire and theft will be detariffed) has already 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 were 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 thin margins that motor insurance are carrying. Another plus point that is sheltering the group to the stagnating motor insurance is its limited portfolio exposure which contributes 24% of the group’s 1Q18 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 segments which give better experience ratings. Meanwhile on the claims side, though poorer experience was observed during the quarter at 47.1%, this is still lower than the peers which are hovering at 50%-75%, thanks to its strategic exposure in fire insurance (at 41%). We believe CIR should normalise back to the low-40% level for the remaining quarters (vs. our FY18E/FY19E assumption of 41%).

Maintain MARKET PERFORM with higher rollover TP of RM16.30 (from RM15.10). We tweaked our FY18E/FY19E CNP by -3% each for house-keeping purposes, while rolling over our valuation base year to FY19E. All in, our TP has been raised to RM16.30 which is still based on an unchanged blended FY19E PER/PBV ratio of 19.5x/2.9x (both based on LPI’s +1SD above its 3-year PER and PBV). Maintain MARKET PERFORM. Risks to our call include: (i) lower premium underwritten, hence growth, (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 27 Apr 2018