INVESTMENT HIGHLIGHTS

• Disappointing 3QFY18 PATAMI due to higher management expense, which is expected to remain elevated in the coming next quarter

• Cumulative 9MFY18 PATAMI came in marginally higher at RM38.3m, below ours and consensus expectations

• Fine-tuning its business model to fit future demand

• Maintain BUY with adjusted TP of RM0.85

PATAMI in 9MFY18 came in below expectations. Tune Protect Group Bhd (TPG) reported 9MFY18 PATAMI of RM38.3m, a marginal increase of +1.7%yoy. However, the earnings were below ours and consensus expectations, accounting for 61.5% and 65.7% of FY18 full year earnings estimates respectively. This was considered a negative surprise given the strong earnings growth momentum seen in 1HFY18 (+17.8%yoy) which we expect will continue to be seen in 2HFY18. We note that the growth was partially offset by the weak 3QFY18 PATAMI, which fell by -37.8%yoy. This was primarily due to the increase in management and commission expenses in 3QFY18 of +23.8%yoy and +8.1%yoy respectively. On a positive front, we observed that net claims have dropped for consecutive three quarters. 3QFY18 and 9MFY18 net claims registered a drop of -30.2%yoy and -23.4%yoy respectively.

Combined ratio deteriorated in 3QFY18. The combined ratio rose the first time in 3QFY18 by +7.7ppts yoy to 101.7%. This suggests that the group was having a marginal underwriting loss in this quarter of 1.7%. The increase in combined ratio was mainly attributable to the management expenses ratio which grew by +15.2ppts to 54%, driven by the digital global travel segment amid expansion into non-AirAsia segment. This is also the highest management expense ratio recorded thus far for the past three years. Accordingly, this led to an underwriting loss of RM1.224m, a drop of >-100%yoy. However, the combined ratio was partly soften by improvement in net claims, which decreased by -8.7 ppts to 32.0%. Nonetheless, the combined ratio displayed slight improvement in cumulative 9MFY18 (-0.5ppts to 91.7%), due to its consecutive contraction in net claims ratio.

The contraction is possibly due to the group retaining less risk in its portfolio and ceded to reinsurance as the group is expanding into multiple markets and seek to reduce uncertainties. Overall for cumulative 9MFY18, the underwriting profit had a marginal fall of -2.3%yoy. We are cognizant that TPG is taking on its expansion plan aggressively into new market segments (e.g. property protection segment and extreme sports protection) and extend its footprints in new regions, especially its retakaful travel business in EMEIA, as well as investments in technologically-driven transformation (e.g. mobile application). We opine that the strategy TPG is undertaking may bode well with its plan to becoming a leading digital insurer in Asia and Middle East. However, we are also cautiously optimistic about the future prospects of the benefits that purportedly could be reaped from these investments going forward.

Positive slight momentum in top-line growth for key segments. In terms of gross written premium, its 3QFY19 performance boosted by +8.7%yoy to RM122.15m, which was driven by the growth in non-AirAsia segment (+22.7%yoy) of the travel business, non-Motor portfolio (+12.7%yoy) of the general insurance as well markets in Thailand (+10.8%yoy) and EMEIA (31.6%yoy). Accordingly, these lend support for the growth in cumulative 9MFY18 of +4.0%yoy to RM415.5m. TPG’s 9MFY19 PAT reported an increase of +2.3%yoy, underpinned mainly by its general insurance segment (+12.7%yoy) and its overseas ventures which are gathering pace (+7.9%yoy) but moderated by higher management expenses from its digital global travel segment. It is also worth noting that TPG’s PAT from overseas ventures grew +68.8%yoy in 3QFY18. We see the encouraging developments in these key markets to be a harbinger of a mid to long-term growth story for TPG and may further strengthen its foothold as a burgeoning digital insurer in the region.

Adjustment in earnings. Given that earnings came in below our expectations, we revised our earnings downwards for FY18F and FY19F to RM50.0m and RM53.5m respectively.

Maintain BUY. Although the top-line revenue was growing steadily YTD FY18, it still has not really been translated into tangible bottom-line figures for the Group. While the multiple digital initiatives and market expansion plan are positive for growth, we have to be mindful that earnings accretion is unlikely to materialize in the immediate term. This is on the account that the progressive initiatives undertaken by management currently, is expected to come at the expense of underwriting margin. Given this view, we are expecting temporary discomfort in the short term period. On a flip side, we are still believers of the group’s prospect in the long term, which currently fine-tuning its model to fit future demand. At this level, we believe the stock appears oversold. Accordingly, the weakness in share price seems to present opportunity for investors to take position. We recommend a BUY recommendation with adjusted TP of RM0.85, pegging its FY19EPS to PER of 12x.

Source: MIDF Research - 16 Nov 2018