INVESTMENT HIGHLIGHTS

• Tune’s 9MFY16 earnings were higher at RM63.4m despite coming in below both ours and consensus’ expectations

• Its 3QFY16 earnings improved against 3QFY15 due to higher net earned premium and improvement in net claims

• We revised slightly lower our FY16 and FY17 numbers

• We adjust our TP to RM2.18 (from RM2.28) but maintain our BUY recommendation

9MFY16 earnings fell short of estimates. Tune registered a strong 9MFY16 PATAMI of RM63.4m (+39%yoy) thanks to higher top line numbers, share of MMIP profits of RM12.4m and >100%yoy PAT growth in Thai associate. However, it fell slightly short of ours and consensus’ expectations, accounting for 68% of respective full year estimates.

3QFY16 results improved. Tune’s 3QFY16 earnings of RM14.3m were also higher against corresponding quarter last year of RM12.9m supported by (1) the growth in net earned premium of RM52.9m (+3.2%yoy) underpinned by the increase in fire & medical (foreign workers) classes of business and (2) improvement in net claims. However, it was the travel segment that led 3QFY16 earnings lower against last quarter of RM26m due to lower gross written premium recorded in Malaysia of RM3.8m resulting from the introduction of Consumer Protection code by MAVCOM (announced in July 2016) that impacted 3QFY16’s travel insurance take up rate. It was also due to higher claims liabilities due to change in IBNR valuation by Labuan’s regulation that the previous provisions were understated.

Impact on earnings. We revised our FY16 and FY17 earnings slightly lower after taking into account the potential shortfall in premium contributions following the impact of a change to ‘opt-in’ booking policy for additional airline services as imposed by MAVCOM. Having said that, we expect travel insurance take-up rate for AirAsia airlines to recover on the back of its impending new strategy to be implemented next year.

Recommendation. We maintain our BUY stance with adjusted TP of RM2.18 based on FY17 sum-of-parts valuation. Our BUY call is premised on (1) the Group has a first mover’s advantage of digital insurance and it will continuously grow within that parameter, (2) dominant market share in local travel insurance, (3) strong double digit ROE (4) healthy balance sheet with a net cash position and (5) undemanding valuation of PBV and PER of 2.8x and 15.5x, (below its 3- year historical PBV and PER average of respective 3.6x and 17.8x)

Source: MIDF Research - 28 Nov 2016