KEY INVESTMENT HIGHLIGHTS

• 9MFY19’s normalised earnings of RM40.0 (+3.9%yoy) came in below both our and consensus expectation.

• Sequentially, 3QFY19’s normalised earnings rose by +20.3%yoy due to lower management expenses and increase in investment income

• Digital partnerships abroad and rolling out of new products to help improve in take-up rate in sales

• Valuation and dividend yield appear to be attractive at current juncture

• Maintain BUY with a revised target price of RM0.72

Marginal earnings growth. Tune Protect Group Berhad (TPG)’s 9M19 normalised earnings grew marginally by +3.9%yoy to RM40.0m. However, this came in below both our and consensus expectations, accounting for 60.0% and 64.8% of the full year FY19 earnings estimates respectively. This was mainly due to lower-than-expected net earned premium (NEP). Sequentially, TPG showed significant improvement in its operational efficiencies and investment results which led to its 3Q19 normalised earnings growth of +20.3%yoy.

Improving operational efficiencies. In 3Q19, the normalised profit after tax (PAT) for the group jumped by +79.1% to RM13.0m, driven by the Tune Protect Malaysia (TPM)’s higher PAT growth contribution of RM6.7m (+116.1%yoy). This was primarily underpinned by the fall in management expenses incurred by TPM which fell -30.1%yoy due to overall reduction in debtors’ impairment provision, lower staff cost, advertising fee and printing charges. In addition, Tune Protect Reinsurance (TPR) also saw its management expense and net commission expense lowered by -41.6%yoy and -20.0%yoy respectively. As a result, these led to a fall in group management expense ratio by -8.6ppts yoy to 45.4% despite the drop in net earned premium (-15.9%yoy). Moving forward, we expect to see a leaner operation and improved cost structure and help to mitigate the fall in the group’s NEP.

Travel insurance and digital partnership to enhance revenue streams. In 3Q19, TPR which accounted for about 55-60% of the group’s earnings, had registered a +8.1%yoy in PAT to RM9.6m. This was predominantly due to premium growth in its business in the Philippines and Thailand by +47.1%yoy and +17.4%yoy respectively amidst the region’s expanding capacity and revenue optimisation efforts. This had led to a reduction in TPR’s combined ratio by -10.8ppts yoy to 64.3% and an increase in its underwriting profit by +21.3%yoy. We opine that the group’s further expansion efforts in Indonesia for the retakaful market and Vietnam through digital partnerships with BaoViet and Military Insurance Corp (MIC) as a positive development to expand revenue opportunities

However, top-line remains on downtrend. On a cumulative basis, the group’s 9MFY19 gross written premium (GWP) continue to decline by -16.0%yoy to RM349.0m. This was mainly attributable to the group’s portfolio restructuring at its general insurance arm, TPM, where it had gradually reduce the reliance on the high-premium pricing of motor portfolio towards more profitable non-motor portfolio. Moving forward, we expect a higher contraction in motor business due to its exit from franchise business. In addition, the travel insurance webpage layout changes have partially contributed to the drop in overall GWP as well. Fortunately, the lower GWP was partially mitigated by the improvement in its management expenses.

Earnings forecast. In view of the earnings underperformance, we are revising our earnings forecast downward for FY19, FY20 and FY21 by -17.0%, -18.6% and -17.8% respectively. This is to take into account the contraction in NEP due to portfolio restructuring and tough operating environment.

Target Price (TP). We are revising our TP to RM0.72 (previously RM0.92). This is derived by pegging its FY20EPS of 7.9sen to PER of 9.1x which is about the 1.0x SD-discount to the group’s 2-year historical average.

Maintain BUY. While the group’s top line has been on the downtrend, we remain optimistic on the group’s abilities to weather the tough operating environment. This is premised on the group’s continued focus on restructuring exercises to take in more profitable businesses which has already been reflected through the change in GWP mix and increased profitability at TPM. Meanwhile, the expansion of the group’s B2B travel business seems to be on track for its digital partnership deal with two prominent entities in Vietnam and its ongoing retakaful operations in Indonesia for its AirAsia flights. This is underpinned by its insurtech solutions which act as a leverage in closing deals with foreign partners. Going forward, we are of the view that the group’s business portfolio abroad will gradually increase its contribution to both top and bottom line. This bodes well with the group’s plan to mitigate the domestic challenging environment and expanding its profitable travel reinsurance market beyond AirAsia and Malaysia. Meanwhile, the group’s current valuation remains attractive and it is trading at a current PE of 8.4x as compared to its 2-year historical average of 11.6x. Coupled with relatively appealing dividend yield of 5.3%, we are maintaining our BUY call on TPG.

Source: MIDF Research - 22 Nov 2019