INVESTMENT MERIT

TUNEPRO is anticipated to recover from a slump with the return of flights expected to translate favourably into earnings. This is compounded with its regional partnerships accumulated over past years. Furthermore, the exit from an inefficient commercial segment could smoothen ratios while claim rates could come off relative to the rise in new policies underwritten. The improving sentiment in the aviation space would also uplift investor appetite. ADD with a fair value of RM0.55 on a 0.75x FY24F PBV valuation.

Return of flight travel to propel reinsurance segment. The group’s core travel reinsurance segment suffered from Covid restrictions pinning down flights. A pick-up is expected as the demand for flights reverts, albeit likely below pre-Covid as reservations could still exist amidst the rising cost of flying. This is seen from FY19’s 9.7m policies issued via local and regional affiliates against only 4.2m policies in FY22. That said, TUNEPRO has built a solid partnership portfolio to offer greater exposure in the Middle East. We gather that FY19 sold 632k policies and surged to 3.1m policies in FY22.

Trimming portfolio to streamline offerings. The group was bogged down by the underperformance of its commercial segment (i.e. marine, aviation cargo, transit) as a notable cause for retention ratios to mostly linger below 70% (vs peer average of 80%). The group intends to exit this space by not renewing existing policies, which we reckon would not be hurtful given its relatively small contribution (FY22: 16% of total gross written premiums but only 2% of total net written premiums). This could allow greater focus onto more vibrant segments such as personal accident (net written premium, FY22: RM94m vs FY21: RM8m) thanks to greater tie-ins (c.70 partners at present) and digital footprint.

Further shaving of hefty combined ratio. TUNEPRO would occasionally book combined ratios of >100% (FY22: 107.6%) owing to disproportions in claims and expenses against top line performance. Going forward, the group believes a more palatable <100% range would be achievable as borders’ reopening would boost income amidst more selective expansion in operating expenses. Meanwhile, claims ratios are expected to normalise from FY22’s 34% on fewer Covid claims and less frequent motor incidences. Additionally, a growing focus in high-margin fire class insurance could also dilute cost ratios.

Poised to return to the black. After five quarters of consecutive losses, 4QCY22 turned profitable (RM558k) as underwriting losses narrowed on improvements in combined ratios in addition to better investment returns as trading activities revitalised. These factors would complement the returning demand for travel reinsurance and better retention ratios. Alongside the normalisation of claims and lower combined ratios (99%/98%), we opine the group could report net profits of RM11.2m/RM20.5m in FY23F/FY24F. Note that this is still below its pre-Covid earnings of RM45m−RM50m which we believe may require longer-term effort to bring combined ratios to c.90%.

We value TUNEPRO at RM0.55, based on 0.75x FY24F PBV. Our valuation implies a 25% discount to its peer average, which we believe is justified given TUNEPRO still lags in terms of ROE (c.3% vs peer average of c.11%) and a lack of dividend potential. That said, its depressed stock price is due to its strong proximity to a prominent local flight operator and the lull in the aviation sector.

As these elements are expected to recover in tandem with stronger economic movements, we believe the appetite for TUNEPRO would as well. Meanwhile, the forecasted doubling of its earnings could draw high growth seekers. There is no adjustment to our fair value based on ESG given a 3-star rating as appraised by us. ADD

Source: Kenanga Research - 21 Mar 2023