Now Everyone Can be Insured

Since its inception in 2009, TIH Group has experienced enormous growth in terms of size and revenue. From a team of 16 people at the start of 2011 to acquiring a general insurance company with approximately 1,000 agents and 15 branches throughout Malaysia, TIH Group is not resting on their laurels and is currently looking for more acquisition targets in other regional markets. Controlled by Forbes Asia businessman of the year in 2010, Tan Sri Tony Fernandes, it is not difficult to understand why TIH Group has been growing at such breathtaking speed. Given the exclusive rights to be the insurance product manager for AirAsia and Tune Hotels, Mercury firmly believes this leverage will work to TIH Group’s advantage and places them in a unique position to benefit from the growth in travel within the Asia-Pacific region and particularly the increasing number of AirAsia’s customers.

Tune Ins Holdings Bhd, which plans to raise RM222.2 million through its listing on the Main Market of Bursa Malaysia on Feb 22, will spend more than half of its initial public offering (IPO) proceeds to repay loans, 22.5% on strategic investments, 12.24% for working capital and the rest to pay listing expenses. Upon completion of the IPO, the market capitalisation of Tune Ins is expected to reach RM1.17 billion based on the indicative retail offer price of RM1.55. Tune Ins is also targeting a minimum dividend payout ratio of 40% of the company's net profit.

What we like:-

1. Strategic relationship with AirAsia and Tune Hotels.
2. Synergies with new acquisition yet to be realized.
3. Minimal cost in expanding in key regional insurance markets.

What we dislike:-

1. Overdependence on AirAsia, but TIHB looking for other partners to diversify its earnings base.
2. Regulation could hurt growth.
3. Rich valuation compared to domestic peers.

Company Background

TIH Group is an underwriter, directly and via reinsurance, of general and life insurance products across the Asia-Pacific region. TIH Group operates two core businesses, an online insurance business through which insurance products are sold to customers as part of their online booking process with our online partners, and other general insurance business, currently only in Malaysia.

TIH’s online insurance business comprises primarily our Travel Protection Plan and also includes other online insurance products such as the AA Lifestyle Protection Plan and the Tune Hotels Lifestyle Protection Plan. Their online insurance business is now underpinned by exclusive long-term agreements with AirAsia. In addition to our relationship with AirAsia, they have entered into a contractual arrangement with Tune Hotels and are considering entering into similar long-term arrangements with other partners within the Tune Companies. Through our online business, we operate in 14 markets across 12 countries.

For the underwriting of their reinsurance business for general and life products across Asia Pacific region, they are currently conducting them through Tune Money Gen Re Ltd (TMGR) and Tune Money Life Re Ltd (TMLR). They have also channelled our business previously conducted through Tune Insurance (Labuan) Ltd (TIL) to TMGR.

In May 2012, TIH acquired an established Malaysian general insurance business, Tune Insurance Malaysia Berhad (TIMB), which has approximately 1,000 agents and 16 branches throughout Malaysia and through which they carry out their other general insurance business. This acquisition enables TIH (through TIMB) to, in addition to the role as an insurance product manager for their online partners, undertake the role as an insurance provider and underwrite general insurance policies directly in Malaysia, as well as to offer a broader range of insurance products.

Milestones

September 2012

• Tune Insurance brand was launched

May 2012

• TIH acquired an established Malaysian general insurance company i.e. Oriental Capital Assurance Berhad (“OCA”). OCA was renamed Tune Insurance Malaysia Berhad on 21 September 2012.

October 2011

• TIH acquired TIL, TMGR, and TMLR TMSB to consolidate our insurance business.

August 2011

• TIH was converted to a public company and assumed present name of Tune Ins Holdings Berhad.

June 2011

• Incorporation of Tune Ins Holdings Sdn Bhd as a private limited company.

April 2011

• Tune Money Life Re Ltd was incorporated as a wholly owned subsidiary of Tune Money Sdn Bhd and subsequently in June 2011, obtained license to carry on Labuan life reinsurance business in from or through Labuan.

February 2011

• Tune Money Gen Re Ltd was incorporated as a wholly owned subsidiary of Tune Money Sdn Bhd and subsequently in May 2011, obtained license to carry on Labuan general reinsurance business in, from or through Labuan.

March 2009

• Tune Insurance (Labuan) Ltd was incorporated and subsequently in April the same year, licensed to operate as an offshore captive insurer in Labuan

Investment Case

Key Value Drivers

Exclusive relationship with AirAsia

AirAsia Group has been very successful in growing their business over the past ten years. The company is both aggressive and innovative in leveraging its successful brand, marketing strength, and unique culture to enter new markets, stimulate demand, and compete successfully against incumbent, full-service carriers and other LCC start-ups. AirAsia has reiterated their plans to strengthen their market positions in a few key regional markets, such as Thailand and Indonesia, Mercury expects AirAsia Group to continue its impressive growth in existing markets.

Tune Ins Holdings Berhad (“TIHB”) is well-positioned to ride on AirAsia’s aggressive expansion into these key regional markets since TIHB is the exclusive insurance product manager for AirAsia and Tune Hotels. As we can see from the table above, AirAsia is growing faster than the markets it seeks to expand its operations. From TIHB’s perspective, it allows them to increase its revenues with minimal additional cost. Hence, Mercury views TIHB as a proxy to AirAsia, but without the fuel cost volatility and high operating expenses.

Synergies with Tunes Insurance Malaysia Berhad

Mercury thinks Tunes Insurance Malaysia Berhad (“TIMB”) is a general insurance company with a lot of room for improvement. In FY2011, TIMB’s net profit margin stands at 9.96%, but we have seen some volatility as it registered a lower 6.61% in 9M2012. Although it has negatively affected TIHB’s overall profitability in FY2012, we believe TIHB will turn around its subsidiary and unlock its synergy values by cutting costs and capturing additional revenues.

Under TIHB, TIMB can now leverage its access to AirAsia and Tunes Companies’ other businesses and have a much wider customer reach since TIHB intends to offer a greater range of products not only to AirAsia and Tune Companies’ customers, but to their staff as well. Besides, TIMB’s current management, fee and commission expenses stand at RM39.65 million, we believe TIHB will make TIMB leaner by trimming its operating costs. TIHB has already stated their intention to improve the effectiveness of its existing network of agents and upgrade its information technology systems in phases, commencing in the third quarter of 2013. Mercury thinks these are moves in the right direction in improving the subsidiary’s bottom line and operational efficiency.

Under-served regional insurance markets

Despite strong insurance market growth in recent years, markets such as Malaysia, Thailand, Indonesia, and the Philippines all have reported non-life insurance penetration rates under 2.0% and corresponding density rates under USD200, which are much lower than the mature markets in the region as well as Europe, North America and Japan. The low penetration rates and density rates suggest that there are ample opportunities for growth.

TIH’s total revenue remains very concentrated in Malaysia, what people see as a concentration risk Mercury thinks it is pretty much a growth story as it represents huge potential upside. According to the US Travel Insurance Association, the online sales of the US travel insurance for 2010 grew by 38% from 2008 and nearly 25% from 2009, while the corresponding amounts for traditional agency channels were 3.4% and 13%, respectively. Mercury believes this will be the future of the travel insurance business in the ASEAN region as well and TIHB will have no trouble heightening the contributions from other markets due to its proven business model.

Key Risks

Future earnings depend solely on AirAsia.

TIH has stated that they aim to extend their travel insurance business beyond AirAsia and Tune Hotels, thereby expanding their customer base. Even though the business model offers an attractive proposition to third parties, it might be difficult for them to establish tie-ups with other partners, including other airlines. Therefore, their strategic relationship with AirAsia could serve as a double edge sword as their future earnings rely very heavily on AirAsia’s performances. Nevertheless, any tie-up with another travel partner should be viewed as positive news for the company.

Regulation could hurt growth.

TIMB currently meets the capital adequacy ratio in Malaysia, which allows for greater flexibility in risk selection and underwriting, increasing retention on profitable lines of business and investment management. Any regulatory change in Malaysia may materially adversely affect their financial condition. Mercury expects TIHB to acquire another general insurance company in other regional markets, but not in the near term future as they require time to integrate TIMB into their operations. Therefore, Mercury expects TIHB to continue doing tie-ups with foreign partners similar to their previous arrangements with Multi-Purpose Insurans Berhad and that should minimize TIHB’s regulatory risk in other regional markets.

Financial Highlights

Impressive profit growth

TIH has recorded impressive growths in profits for the past four years. The Group’s Net Profit after Tax (“NPAT”) has grown from RM17.1m in 2009 to RM30.2m (9m12 annualized figures), which is equivalent to a CAGR of 20.6%. On the other hand, the newly acquired subsidiary, TIMB’s NPAT has jumped from RM5.8m to RM17.7m (9m12 annualized figures) over the last three years, with a CAGR of 45.1%.

The high growth is could be attributed to the fact that TIH is the exclusive insurance product manager of AirAsia or it could be down to improving risk management by the company. TIH’s percentage (%) of Net Claims to Net earned premiums has been dropping since 2009. This is a sign of improving risk management and having a better understanding of the market. This is definitely one of driving factors behind its remarkable profit growths.

High Return on Equity

TIH Group generates good return to its equity investor. Prior to its upcoming listing in the last three years, it has managed to register very high Return on Equity (ROE) of 152%, 159%, and 157% in each year respectively. This is a testament to the management’s skills in maneuvering the company in high speed and also efficient in churning out profits for the shareholders.
Low gearing with no debts post IPO

Prior to listing, TIH has a total borrowing of RM130.9m in its balance sheet. According to the IPO prospectus, the management will spend 59.86% of the IPO proceeds to fully pay back the bank borrowings. In addition, once the debts have been cleared, TIH will be able to save a total finance cost of approximately RM 7-12 million and this will further improve its earnings in next financial year.

Bull case:

Implies 2013-2014E bull case PER 22x

Stronger growth in gross premium earned; improved investment income:

1. Regional economic growth stronger than the forecasted 7% and higher intra-Asian air travel.
2. AirAsia continues its impressive market penetration rate in key regional markets.
3. Net profit margin around the area of 25-30%, given strong growth in take-up rate for travel insurance and its other general insurance packages.
4. Successfully turnaround TIMB to be a much leaner and profitable company, results in bigger synergy from cost-saving and higher revenues.

Base case:

Implies 2013-2014E base case PER 18x

Improving fundamentals on core business; face competition on new fronts.

1. Resilient economic growth in the ASEAN region in 2013 and staying at 5-6% through 2014.
2. Top line grows at a slightly lower Compounded Annual Growth Rate (CAGR) of 25% from 2013 to 2014, with most new businesses coming from existing markets.
3. Contribution from TIMB continues to grow in revenue and lower costs, albeit marginally.
4. Face fierce competition in other regional insurance markets.

Bear case:

Implies 2013-2014E bear case PER 15x

Slowdown in intra-Asian air travel in year 2013-2014E; tough competition in the other regional markets.

1. The regional economy suffers from global currency wars as trade dynamics get disrupted; growth to slow to 3-4% through 2014.
2. AirAsia fails to continue its high growth in key regional markets, and face stiffer competition in Malaysia from new market entrant, Malindo Airways.
3. TIHB’s efforts in turning around TIMB do not translate to actual results, net profit margin remains thin, which negatively affects the holding company’s overall profitability.
4. Key regional insurance markets, which are underserved, remain not ready for online travel insurance due to lack of education of insurance packages or accessibility, or both.

Valuation

We set a BUY call on TIH with a target price of RM1.72, derived from our dividend discount model based on the assumptions stated below. We opined that the DDM valuation method is more appropriate in this case because estimating cash flows for financial service firms is difficult and not feasible. Therefore, we fall back on the only observable cash flow – dividends.

The target price is pegging to a PER of 19.8x and PB of 3.25x, based on FY2014 EPS and BVPS of 8.7 cents and 53 cents, respectively. Our target price indicates an upside potential of 10.96% from the IPO price. We like its exclusive relationship with AirAsia, which is one of the most successful low cost carrier operators in the world. We believe TIH will be able to capitalize on AirAsia fast growing business in Asia, particularly Indonesia and Thailand. In addition, we are also optimistic that the expected cost saving synergies from the TIMB acquisition in 2012 will be realized under the guidance of a well-known entrepreneur, Tan Sri Tony Fernandes. Backed by the expected changes to TIMB’s management and operations, we expect TIH’s net margin to improve by 3-5% in the foreseeable future.

Source: Mercury Securities Research - 31 Jan 2013