Within expectations. 1Q19 core net profit of RM77.2m is within our and consensus expectations, making up 23% of both full-year estimates. The absence of dividends is also within expectations. The group typically declares dividends twice a year.

YoY, 1Q19 revenue grew by 3% on better gross premiums from the group’s key Fire and Motor insurance segments (+4%) but was offset by poorer performance by the Marine, Aviation & Transit (-18%) and Miscellaneous (-16%) insurance segments. Net earned premium grew by 9% from a higher retention ratio (65.8%, +3.9ppt), but operating profit expanded by only 5% following a higher combined ratio incurred (73.9%, +0.7ppt). This was an accumulation of a higher claims incurred ratio (47.4%, +0.3ppt as improved motor claims was negated by higher miscellaneous claims) and net commission ratio (+5.2%, +1.6ppt) but lower management expense ratio (21.2%, -1.3ppt) was registered. 1Q19 core net profit registered at RM77.2m (+6%).

QoQ, 1Q19 revenue was flattish as a 3% decline in general insurance top-line (mainly on lower net fire insurance premiums) was negated by a c.87% jump in investment income. However, a higher combined ratio of 73.9% (+9.6ppt) was led by greater net claims from the Marine, Aviation & Transit as well as as miscellaneous insurance businesses. This translated to a lower 1Q19 net profit by 8%, supported by better effective taxes of 19.2% (-5.0ppt).

Looking into 2019. 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 insurance in 2019, likely leading to competition-driven margin compression. However, 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 to deleveraging its exposure in construction and engineering sectors by venturing into other classes (i.e. medical, workmen compensation).

Post-results, we leave our FY19E/FY20E earnings unchanged.

Maintain MARKET PERFORM with a higher TP of RM16.50 (from RM16.30, previously). Our valuation is based on an unchanged blended PER/PBV of 19.0x/3.0x on a rolled-over FY20E base year. The valuations are based on the stock’s respective +1SD over the 3-year mean of PER and PBV. Currently, we believe the sentiment for the stock could be helmed by the solid backing from a sizeable financial institution (i.e. Public Bank) which may provide comfort on the sustainability of the group’s operations. Dividend returns of 4.6%/4.7% for FY19/FY20 could be decent enough for investors as well.

Risks to our call include: (i) higher/lower premium underwritten, (ii) higher/lower-than-expected claims, and (iii) higher/lower-than-expected management expense ratio.

Source: Kenanga Research - 16 Apr 2019