FY18 net profit of RM314.0m (+1%) is within expectations, although full-year dividends declared (68.0 sen) was a positive surprise. Immediate concerns could be headwinds from the coming 2019 fire insurance review, given the group’s sizeable exposure (c.40% of total revenue). Nonetheless, this could be mitigated by improving presence in other insurance classes. Maintain MARKET PERFORM and TP of RM16.30.

Within expectations. FY18 net earnings of RM314.0m is within our/consensus expectations, amounting to 97%/101% of respective fullyear estimates. Our top-line expectation was closely met (96% of fullyear estimate), although we had more bullish expectations on gross premium growth. An interim dividend of 42.0 sen was declared, for a total FY18payment of 68.0 sen (representing a payout of 86%). This beat our anticipated 60.0 sen expectation in lieu of the flattish earnings.

YoY, FY18 revenue increased slightly by 3% as gross premium growth from the key Fire and Motor insurance segments (+11%) was offset by a decline in Marine, Aviation & Transit (-4%) and Miscellaneous insurance segments (-8%). However, operating profit was flattish (+<1%) with the rise in FY18 combined ratio (67.9%. +3.2ppt), from higher claims incurred ratio (CIR) of 40.9% (+2.4ppt) and net commission ratio of 6.3% (+1.1ppt). Note that this was mainly caused by the higher motor claims in 1Q18 (CIR: 47.1%) alongside the absence of “incurred but not reported” claims released from Malaysia Motor Insurance Pool; hence, poorer claims experience. Notably, CIR in following quarters has normalised back to c.40% level. FY18 core earnings subsequently registered at RM314.0m (+1%).

QoQ, 4Q18 revenue of RM389.0 stagnated as better general insurance sales (+3%) was met with a dip in investment income (-43%). However, following higher CIR at 39.1% (+1.9ppt) and effective taxes at 24.2% (+2.9ppt), 4Q18 net profit saw a 9% decrease.

Still hanging on. We believe the group’s trajectory (particularly on its lion’s share Fire insurance segment) could still be backed by Public Bank’s mortgage growth rates, fuelled by their wide agency distribution network. However, concerns of maintaining a viable combined ratio (which we expect to hike up closer towards the c.70% levels) are looming ahead of the coming review of fire class insurances in 2019, likely leading to competition-driven margin compression. Though, the motor segment continues to demonstrate encouraging transaction volumes, indicating the strength of the group in this segment following its detariffication. On Miscellaneous items, the group looks towards deleveraging its exposure in construction and engineering works by venturing into other classes (i.e. medical, workmen compensation).

Post-results, we trim our FY19E earnings by 4.2% on housekeeping adjustments as we incorporate FY18 full-year performance, particularly on our ratio assumptions. Additionally, we introduce our FY20E numbers.

Maintain MARKET PERFORM with an unchanged TP of RM16.30. In addition to lowering earnings estimates, we also tweak our blended FY19E PER/PBV valuations to 19.0x/3.0x (from 19.5x/2.9x) as we relook at the stock’s +1SD over its 3-year mean PER and PBV. Presently, the group’s dividend offerings may continue to seem fair to investors. Although capital upside may be limited, backing by a sizeable financial institution (i.e. Public Bank) may provide comfort on the sustainability of the group’s mid-to-long term operations.

Source: Kenanga Research - 30 Jan 2019