9MFY20 earnings saw a commendable mild improvement YoY thanks to sequentially stronger earnings following the reopening of the economy. While 4Q looks like another challenging quarter with the CMCO in operation, we opined it will be manageable and the impact is unlikely to be severe as that in Q2. We maintain our OUTPERFROM call with a lowered TP of RM15.35. Earnings have been relatively resilient while we think its dividend yield of c.>5% is attractive amidst a low interest rate environment.

In line. 9MFY20 Core Net Profit (CNP) of RM241m made up 73%/79% of our/market estimates. As expected, 3QFY20 saw a rebound given the implementation of the RMCO beginning of June. No dividend was declared as expected.

YoY, 9MFY20 CNP saw a mild improvement (+2.4%) to RM242m on the back of an uptick in gross earned premiums (GEP) of +0.8% to RM1,126m. The two main GEP contributing segments; Fire (~41%) and Miscellaneous (31%) saw contrasting fortunes; Fire (-1.9% YoY) and Miscellaneous (+3.1%), with the Motor segment (+5.0%). Combined Ratio fell by 250bps to 70% as Claims Incurred ratio fell 150bps to 44% and Management Expense stayed flat at 20% offset by Net Commission ratio falling 90bps to 5.8%. Other income moderated (+4% to RM182m) dragged by weaker investment income (-16%) and other operating income (-48%) which was offset by a capital gain of RM17.5m.

QoQ, With the RMCO introduced in 3Q, CNP rebound 11% to RM86m, underpinned by slight growth in NEP (+1.1%) to RM254m together with improvement in both Claims and Commission Ratios. GEP saw a dip (- 1.2%) to RM377m dragged by the fall in the Fire Segment (-7.4%), likely underpinned by lower contribution from commercial property cushioned by Motor and Miscellaneous segment at +2.2% and +1.6%, respectively, as the economy slowly reopened.

Challenging 4Q. While the 3Q earnings saw an improvement thanks to reopening of the economy, we do see risks ahead in 4Q given the implementation of the CMCO. We think the Fire segment could come under pressure as its commercial side had seen a slower recovery even under the RMCO with the Motor segment could lose momentum given the uncertainties ahead.

Post results, our FY20E earnings are unchanged as results are in line.

Maintain OUTPERFORM but TP lowered of RM15.35 (from RM15.90) applying FY21E 2.78x PBV (previously 2.92x FY21 PBV) valuation (implying a 5-year mean with a 0.5SD below mean) as we do not see lofty ROEs ahead (5-year mean at 18%) and expected to maintain at c.16% ahead of the liberalisation of the insurance industry. At current price level, its >5% dividend yield could appeal to yield- seeking investors, even if the group lowers its pay-out to its 5-year average of c.76%.

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

Source: Kenanga Research - 16 Oct 2020