KEY INVESTMENT HIGHLIGHTS

• 1QFY20’s normalised earnings fell -86.4%yoy to RM2.5m which came in below our and consensus expectation

• This was mainly attributable to the larger-than-expected decline in TPR’s travel business (-22.9%yoy in GWP)

• MCO and ongoing Covid-19 to continue to add significant downward pressure on its earnings from both TPR and TPM

• Downgrade to SELL with a revised target price of RM0.25

Below expectation. Tune Protect Group Berhad (TPG)’s 1QFY20 normalised earnings decreased by -86.4%yoy to RM2.5m. This came in below both our and consensus expectations, accounting for 5.4% and 5.8% of the full year FY20 earnings estimates respectively. This was mainly due to the lower-than-expected net earned premium (NEP) from TPR (-13.8%yoy) and TPM (-8.3%yoy) as caused by the reduction in air travel demand and challenging general insurance landscape respectively.

Top-line to face uphill battle. The group’s 1QFY20 gross written premium (GWP) and operating revenue continue its downward trend, declining by -5.2%yoy and -3.4%yoy to RM115.0m and RM122.4m respectively. This led to the group’s NEP to drop -10.3%yoy to RM58.4m which was contributed by the fall in NEP of both TPR (-13.8%yoy) and TPM -8.3%yoy to RM20.0m and RM38.3m respectively. This was mainly attributable to the group’s reduction in air travel business from TPR and portfolio restructuring at its general insurance arm, TPM amidst an increasingly competitive operating environment. Moving forward, we expect the top-line to continue to trend downward due to the potential significant business loss from the AirAsia segment in FY20, particularly in 2QFY20 in view of the extended MCO.

Underwriting profit to be in jeopardy. To recall, note that the trend of underwriting profit generally follows of that the combined ratio. In 1QFY20, the declining NEP and increased net claims (+18.8%yoy) and management expenses (+2.0% yoy) have led to a deterioration in net claims ratio (+9.6ppts yoy) and management expenses ratio (+5.1ppts yoy) to 39.2% and 42.5% respectively. Ultimately, the group’s combined ratio worsened marginally by +13.3ppts yoy to 95.3% which has caused the underwriting profits to plunge -76.5%yoy to RM2.7m. Moreover, we expect the anticipated lower business activities from its most profitable travel insurance segment (i.e. AirAsia) to continue to place significant downward pressure on its underwriting profit in coming quarters. We also do not discount the possibility of the group to post underwriting losses in 2QFY20 given the potential further drawdown in NEP amidst an unfavourable claims environment. Note that a combined ratio of >100% means that the group suffers an underwriting losses.

Earnings forecast. In view of the MCO, Covid-19 led travel restriction and tough operating environment, we are revising downward our normalised earnings forecast for FY20, FY21 and FY22 to RM19.3m, 28.0m and RM35.0m respectively. This is to take into account the contraction in NEP due to portfolio restructuring and tough operating environment as well as impact from COVID-19 on air travel demand.

Target Price (TP). We are rolling forward our valuation base year to FY21 and revise our TP to RM0.25 (previously RM0.42). This is derived by pegging its FY21EPS of 3.7sen to PER of 6.9x which is about the 1.0x SD-discount to the group’s 2-year historical average.

Downgrade to SELL. We are foreseeing a bleak outlook of the group’s earnings performance in FY20 where it could be potentially dragged by its AirAsia segment in the intermediate term due to the extended MCO throughout 2QCY20 and COVID-19 outbreak which has disrupted global travel. To recall, travel insurance has been the key profit contribution for the group (>70%). Moving forward, we are expecting that the reduced air travel demand and unfavourable claims environment to put further downward pressure on its revenue and NEP which could possibly result in lower underwriting profit as evidenced in 1QFY20. Note that the travel segment still accounts for about 80.0% of the NEP of its TPR’s businesses. We also expect the group’s underwriting profit to be negatively affected by the general insurance arm, TPM, due to the increasingly competitive landscape and weakening economic indicators. All in, we are downgrading our call on TPG to SELL from previously NEUTRAL.

Source: MIDF Research - 27 May 2020