INVESTMENT HIGHLIGHTS

• FY18 normalised net profit exceeded expectations of both ours and consensus by 11.4ppt and 8.1ppt respectively

• Top-line growth in terms of GWP continued to be driven by its most profitable travel reinsurance segment

• Normalised combined ratio improved due to lower claim ratio and resulting in higher underwriting profit yoy.

• FY19 strategy focuses on global market expansion for its travel reinsurance, portfolio restructuring for its general insurance and continue on its digitalisation plan

• Maintain BUY with adjusted TP of RM0.87

Normalised net profit in FY18 exceeded expectations. Tune Protect Group Berhad (TPG) reported FY18 normalised net profit of RM55.7m (excluding voluntary separation scheme (VSS) cost of RM2.8m net of tax), representing an increase of +11.4%yoy. This translated to 111.4% and 108.1% of ours and consensus full year earnings estimates respectively. On a quarterly basis, it posted a stronger-than-expected 4Q18 normalised net profit which increased by +67.7%yoy to RM14.0m, signalling earnings recovery and helped to buoy the full year earnings results.

Positive growth in FY18 gross written premium (GWP). TPG’s FY18 GWP registered a positive momentum of +0.2%yoy amid a rather flattish year for general insurance. This was primarily driven by its travel reinsurance segment (Digital Global Travel), in which its GWP rose by +10.9%yoy to RM116.6m. However, it was partially offset by a drop of -2.2%yoy in its general insurance segment (Tune Protect Malaysia) due to portfolio restructuring and cost rationalisation. Meanwhile, net earned premium (NEP) declined by -8.15%yoy as a result of an increase of premium ceded to reinsurers which grew +24.5%yoy. This led to a fall in the retention ratio of -7.3ppts yoy. We view that the lower retention ratio was a prudent move in reducing uncertainty in its increased policies issued and amid its expansion plan in new territories abroad as well as portfolio restructuring for its general insurance segment. This risk management strategy seems to have paid off with a considerable improvement in lower net claims.

Normalised underwriting profit and combined ratio improved. Underwriting profit increased by +9.0%yoy to RM21.1m as a result of the faster pace of net claims decline (-28.2%yoy) compared against the rise in management expenses (+10.8%yoy). In FY18, the overall claims ratio dropped to 34.2% (-9.6ppts yoy) while the normalised management expense ratio rose to 44.3% (+6.5ppts yoy) and net commission ratio increased slightly to 14.4% (+2.0ppts yoy). As a result, overall normalised combined ratio improved marginally by -1.1ppts yoy to 92.8%. We opine that the lower claims ratio was mainly due to higher premiums ceded as a result of higher motor quota share (QS). We opine that this is a positive development going forward in FY19 for TPG should the claims ratio continue to make gradual improvement. Also, this could possibly compensate for higher management expenses given the continued investment in technology and expansion abroad.

Digital transformation and expansion plan continues. In FY18, TPG’s digital channel growth saw double-digit growth in terms of number of customers, policies and GWP of +30.0%yoy, +40.0%yoy and +14.0%yoy respectively. The growth was mainly contributed by its digital global travel business segment whereby the policies issued via AirAsia, Cebu Pacific, AirArabia and B2B have seen a growth of +47.5%yoy and +40.1%yoy to 10.6m and 10.7m respectively. Its share of results of joint venture in the EMEIA region has increased by more than +100%yoy to RM2.3m. Going forward in FY19, we view that TPG’s joint venture segment will continue to be on upward trend and contribute to its bottom-line as the group is looking to expand into Vietnam and launch of its Retakaful business in Indonesia.

Earnings revised upwards. Given that earnings came in above our expectations, we revised our earnings upwards for FY19F to RM60.0m, representing a +12.1% increase from previous forecast. This is premised on improved top-line growth (both GWP and NEP), lower claims ratio, higher investment income and profit from overseas ventures going forward in FY19.

Target Price (TP). In view of earnings revision, we are adjusting our TP to RM0.87. This is achieved by pegging its FY19EPS to PER of 12x.

Recommendation. The earnings recovered by end of FY18 and we expect it to carry forward into FY19. TPG’s multiple progressive initiatives on market expansion and digitalisation seem to be bearing fruits as both top-line (i.e. GWP) and bottom-line continue showed positive growth. Digitisation of the business also saw workforce rationalisation at its subsidiary (Tune Insurance Malaysia Berhad). This provides further opportunities for operational cost savings moving forward. By doubling down on its efforts in leveraging the AirAsia ecosystem such as the launching of dynamic pricing 2.0 and affinity partnerships, we opine that these plans will likely boost TPG’s bottomline as AirAsia is still the current largest profit contributor. Venturing into Indonesia’s travel retakaful market in possibly 2H19 will likely be a growth catalyst as well for TPG considering its demographics and vast population. All in, we view that with TPG’s focus on capturing future demand with technology and expansion while keeping its costs under control will make it a long-term value play. Accordingly, the weakness in share price seems to present opportunity for investors to take position. All factors considered, we maintain a BUY call on TPG.

Source: MIDF Research - 25 Feb 2019