MNRB’s 1Q14 earnings were below our expectations due to high claims and lackluster investment performance. We retain our negative outlook and expect 2Q to remain weak. We lower our FV to MYR3.15 (from MYR3.30) on the EPS reduction. While share price could be supported in the near term due to the upcoming ex-date of its dividends (a 9% gross yield), we see this as an opportunity to sell into strength. 
 
- Below expectations. 1Q14 group core earnings of MYR38.6m declined 20.8% y-o-y and accounted for 30.5% of our forecast. Against historical earnings, we deem it to be below expectations. Earnings in 1Q13 and 1Q12 made up 43.2% and 48.0% of the respective FY13 and FY12 earnings. Q-o-q, however, earnings improved 38.6% due to higher losses incurred in the reinsurance and retakaful business in 4Q13.

- Double whammy from claims and investment. Reasons for the y-o-y earnings decline were: i) a mere 6.3% y-o-y growth in gross premiums (flat growth q-o-q), partially weighed by further liberalization of voluntary cession (VC) levels, ii) net claims surged 37.4% y-o-y against the lackluster growth in gross premiums, iii) a 8.2% decline in investment portfolio performance, due to lower investment gains of only MYR6m (vs MYR18m in 4Q13 and MYR15m in 1Q13), and iv) an unstated amount of late payment penalty relating to a service tax and stamp duty imposed on a subsidiary, MMIP Services SB.  

- Risks remain high. Our negative view on this stock still stands, as: i) diversification from its core reinsurance business is lacking, ii) increased YTD gearing to 22.6% from 17.9% in FY12, iii) persistently high double leverage ratio at 148% (147% in FY12) and leverage (at the company level) of >50% in FY13, due to reduced equity at the company level, and iv) 2Q is traditionally a loss-making quarter due to high loss ratios. 

- Forecasts changes. Following a -4%/-8% FY14F/15F EPS revision upon adjusting our expenses and book value (see Figure 4), our new FV of MYR3.15 is pegged to an unchanged 0.6x FY14 P/BV, at a discount to the region’s reinsurers’ 1x P/BV.  

- Maintain SELL. We advise investors to sell into strength, as we expect MNRB to reveal the ex-date of its 32 sen FY13 gross DPS (27 sen net), within the next two months. Despite the attractive 9% gross dividend yield (6.7% net), future payouts may be compromised by weak underlying earnings outlook and balance sheet indicators. 

Source: RHB