Tune Ins Holdings (TIH) plans to acquire 70% of PT Batavia Mitratama Insurance (BMI), an Indonesian insurer, for a total purchase consideration of MYR26.1m (USD8.6m). The transaction will help the company underwrite premiums in its online travel business directly, and potentially unlock business opportunities in Indonesia’s under-penetrated general insurance (GI) industry. Keeping our earnings forecasts unchanged, we maintain our BUY call and MYR1.75 FV.

¨      Utilizing IPO proceeds. TIH will spend about MYR12.7m (USD4.2m) to acquire 70% of BMI’s paid-up capital, and another MYR13.4m (USD4.4m) to acquire the rights for its new share subscription. BMI’s FY12 shareholder equity stood at MYR16.5m (USD5.4m), while its FY12 net earnings came in at MYR1.87m (USD0.6m). The deal will be funded by MYR33m proceeds from TIH’s listing in February this year.

¨      A fair deal. The total purchase consideration of MYR26.1m translates into 2.26x P/BV or 14x P/E FY12 shareholder equity and earnings respectively. Naturally, the deal was valued higher on the new subscription rights (at 1.16x PBV) against the purchase value of BMI’s current share capital (at 1.10x PBV), as it needs further capital injection to fulfill the central bank’s capital requirements of IDR70bn. Although valuations look rich compared to the median P/BV transaction multiple of Asian insurers at 1.73x, we deem this as fair given BMI’s profit track record. While the deal is small, it is earnings accretive for TIH (which is trading at 3.1x FY13 BV and 18.3x FY13 EPS).

¨      No immediate impact to earnings. As we do not expect any immediate impact on FY13 earnings, we keep our forecasts and FV unchanged. BMI’s earnings contribution is small at 4% of TIH’s FY12 earnings. While no profit guidance was given, we estimate at least a 2% accretion to FY14 EPS, potentially giving a 1.5% upside to our FV from MYR1.75 to MYR1.78 (not yet factored in). While the immediate benefit is the ability to underwrite online premiums directly, further business opportunities could be unlocked given BMI’s position in Indonesia’s motor insurance segment, assuming TIH replicates its strategy in OCA’s acquisition. The deal is expected to complete within 2HFY13.

¨      Direct entry into Indonesia’s GI industry. The potential acquisition will allow TIH to gain a GI license and access new markets. Ultimately, the company will be able to directly underwrite its online premiums and progress to the next stage of the regional sales infrastructure, especially since its major shareholders’ regional base is in Indonesia.

¨      What is in store for BMI? TIH stated that BMI’s primary activity is the vehicle business at “Total Loss Only” coverage. According to media reports, BMI has a large exposure to motor insurance, which contributed the bulk of its business owing to the strong motor sales in Indonesia. We believe TIH has secured a good foothold into the Indonesia’s motor insurance segment, which is reminiscent to Sanlam’s rationale for acquiring a niche Malaysian motor insurer P&O (PO MK, NR) at 2.5x P/BV, based on the latest reported deal value. TIH could replicate its success with OCA’s turnaround and benefit from the enlarged customer base and cross-selling capabilities, starting from the motor insurance market.

¨      TIH may be comfortable at 70% stake. We believe BMI is striving to meet the regulatory requirements for its capital requirements. Indonesian insurance companies are obliged to fulfill the minimum capital requirement of IDR70bn in 2012 and IDR100bn by 2014. As a comparison, BMI’s equity stood at only IDR53bn. We believe TIH paid a slightly higher valuation for the purchase of the rights to additional shares. This is likely to have taken into account potential future capital injection to bring up BMI’s capital to match capital requirements. We believe TIH is comfortable with the 70% shareholding given that BMI is the first regional deal for the company, despite the fact that the foreign shareholding limit is at 80%.

¨      Further acquisitions lookout. TIH will continue to be on the look out for more M&A opportunities. The key target markets are other key AirAsia passenger growth markets, such as Thailand and Philippines. As the allocated MYR33m will be utilized for the MYR26.1m acquisition of BMI, we believe the company may utilize its internally generated funds for other acquisitions. We therefore retain our dividend forecast assumptions of a minimum 40% payout.

Source: RHB