INVESTMENT HIGHLIGHTS

• Tune’s FY17 PATAMI came in at RM46.0m

• Cumulative earnings were dragged down by higher overall claim expenses

• Topline numbers showing positive signs

• Earnings revision to FY18 and FY19

• Maintain BUY with adjusted TP of RM1.26

Lower cumulative PATAMI. Tune Protect recorded FY17’s normalised PATAMI of RM46.0m, dropping by -42.4%yoy. The earnings accounted for 70.9% and 78.7% of ours and consensus FY17 full year estimates respectively, which is below our expectation. Despite an increase in the group’s FY17 gross earned premiums of +6.0%, earnings declined substantially partially due to higher overall claim expenses and higher impairment provision in FY17.

Claims incurred were seen higher for FY17… In comparison to the same period last year, FY17 gross claims paid grew by +5.1%yoy due to higher claims in Fire and PA segments. In terms of the group’s net claims incurred, it was up by +24.3%yoy for FY17. This translated to FY17 net claims ratio of 43.8%, an increase of +9.8ppts yoy. The increase in ratio did not come as a surprise considering that the recent floods in Penang had given rise to flood claims. Despite the presence of such the natural catastrophe in FY17, we believe the claims ratio were still manageable, given that the group’s 4-year historical average ratio was at ~40.0%. Notably, higher expenses had led up to the increase of combined ratio for FY17, which went up by +10.8ppts to 94.0%. As a result, underwriting margin tumbled by -65.4% to RM19.4m.

Topline numbers showing positive signs. Despite the drop in earnings, it is noteworthy that gross written premiums grew by +3.3%yoy for FY17, continuing its positive topline momentum. This positive variance was driven by product bundling and business in Thailand. Moving forward, we believe the positive trajectory will continue to be driven by its various digital initiatives for higher customer acquisition.

Deploying efforts to more lucrative segments of insurance business. Despite the FY17 earnings were impacted by notable increase in claim expenses, we remain positive on the prospect of earnings performance moving forward as the group selectively grow preferred line of business in CAR, Bonds and Foreign Workers protection. Collectively, the group’s general insurance business achieved +5.4% full year growth for Gross Written Premium, outpacing the industry’s growth. We are also encouraged to see that the group is constantly working on new areas of growth, to best align with its digital agenda. Notably, the group is now working towards increasing its presence in the global Insurtech space (i.e. use of technology innovations designed to extract savings and efficiency from the current insurance industry model), as it plans to introduce P2P insurance model in ASEAN market in the near term.

Earnings adjusted downwards. While we believe the business trajectory to remain positive, we revise our forecasts downward by -9.6% and -22.6% for FY18 and FY19 respectively due to the higher insurance claims and management expenses..

Valuation. Moving forward, we view that Tune Protect’s new initiatives in technology, customer segmentation and product innovation will add more headroom for the business to grow. This will be further supported by its long term arrangement with AirAsia and Tune Hotels, allowing TIH an access to a substantial pool of client database. Also, we believe AirAsia’s aggressive capacity expansion to bode well with the recovery of its travel insurance business, stemming from higher expectation of passenger carried by AirAsia. Given this optimism, we maintain our BUY call on Tune Protect with an adjusted TP of RM1.26 (from RM1.42), pegging it FY18EPS to PER of 14x. We adjust our TP due to the revision to our FY18 earnings. We believe any retracement in the share price as a good opportunity for investors to accumulate its shares.

Source: MIDF Research - 1 Mar 2018