9MFY19 missed expectations. 9MFY19 PATAMI of RM235.8m made up 70% and 71% of our and consensus’ respective full-year estimates. We deem this to be below our estimate as the claims ratios from the Miscellaneous segment appeared to be lofty throughout the year (9MFY19: 64.9% vs. 9MFY18: 50.7%) against our anticipation. No dividends were announced, as expected.

YoY, 9MFY19 operating revenue of RM1.20b (+7%) was stronger on higher gross earned premiums (GEP) across all segments while net earned premium grew by 10% as retention ratio improved (66.8%, +1.9ppt). However, operating profit only increased by 2%, as a higher claims ratio of 45.2% (+3.6ppt) resulted in a higher combined ratio during the period (72.5%, +3.2ppt). This was mainly due to more incidents under the Miscellaneous Insurance. All in, 9MFY19 net profit registered at RM235.8m (+3%).

QoQ, 3QFY19 operating revenue rose by 10% as GEP (+6%) was boosted by better fire and motor performances in addition to greater investment income (+77%). Overall, 3Q19 net profit expanded by 24% on softer combined ratio (71.4%, -0.9ppt) and effective tax (21.1%, - 2.5ppt).

Firm on the steering wheel. Fire insurance continued to be the leading contributor to the group’s business, accounting for c.40% of GEP and c.65% of underwriting surplus before management expenses. With regards to Bank Negara’s planned review of fire class insurance, the group could take a breather given the one year extension of the review for a potential liberalisation. Potential bummers in the near-term could come from the Miscellaneous business segment, which covers construction and engineering items. We believe that as the segment could be in a lull, it could further dampen the group’s immediate prospects as competitive rates and frequent claims could undermine the group’s profitability. On the flipside, this could be cushioned by better performances registered in the motor and marine, aviation & transit businesses.

Post-results, we trim our FY19E/FY20E earnings by 4.5%/3.5% mainly to account for higher claims incurred ratios to c.44% (from c.41%/42%).

Maintain MARKET PERFORM but with a lower TP of RM16.00. We adjust our target price as we move valuation to a 3.0x FY20E PBV from a blended 19.0x/3.0x FY20E PER/PBV (close to the stock’s 3-year forward average). We believe the sentiment for the stock could be steered 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. While the stock’s ROE of c.15% may not be up to mark as compared to the likes of TAKAFUL’s c.30%, generous dividend payments with potential yields 4.7%/4.8% for FY19/FY20 could be a winning attribute to some investors.

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 Oct 2019