We initiate coverage on Tune Ins Holdings (TIH) with a BUY recommendation and MYR1.75 FV (+25% upside), pegged to 18x FY14 EPS. Its earnings are supported by the strong expansion of its online insurance business, better underwriting margins and potential tie-ups. These positive drivers are kept in balance by better claims and expense management. We think TIH deserves a premium due to expectations of more robust earnings growth relative to its local peers.

We've got you covered. TIH’s long-term partnership with AirAsia enables it to ride on the low cost carrier’s aggressive network expansion into new markets. The online travel insurance business remains highly profitable, making up 20% of the group’s revenue but over 50% of PAT. There are significant opportunities to boost its online insurance business, such as via the opening of new markets, notable increases in take-up rates, higher passenger growth and stronger contributions from countries where it can fetch better profit margins.

TIMB’s turnaround strategy. Its non-online general insurance (GI) arm Tune Insurance Malaysia (TIMB), acquired in 2012, is a potential turnaround story. Plagued by losses in the past, TIMB is currently making efforts to improve its profitability. It has discouraged its >1,000-strong agents from selling non-profitable products and is also striving to improve its claims ratios. These efforts could potentially bring down TIH’s group combined ratios to <70%, which should boost underwriting margins.

Initiate coverage with BUY. Our MYR1.75 FV, pegged to 18x of FY14 EPS, provides a 25% upside. The P/E is pegged to TIH’s 3-year CAGR of 17% vs the average 1.0x P/E-growth (PEG) ratios of the insurance stocks under our coverage. That said, we do not advocate TIH as a dividend stock given its low dividend yield of 2%-3%, assuming minimum payout ratio of 40%.cf

Source: RHB