Tune Ins’ share price may be on an uptrend amid positive sentiment spurred by its MOU with a prominent figure in Dubai’s aviation industry – a sign of the insurer’s efforts to diversify away from its major partner AirAsia. While its 2Q14 results were affected by weak regional travel demand, we view it as a short-term hiccup and expect a better 2H. Maintain BUY, with a higher MYR3.00 FV (24x FY15F EPS).

We expect Tune Insurance (TuneIns) to report 2Q14 travel premiums of ~MYR22m(2Q13: MYR23m), assuming a 26-32% take-up rate. AirAsia’s (AIRA MK, BUY, FV: MYR2.78) passenger growth rose 13% y-o-y, contributed by AirAsia Indonesia (1% y-o-y), AirAsia Thailand (16%), AirAsia Malaysia (3%), AirAsia Zest (530%) and AirAsia X (AAXMK, BUY, FV: MYR1.31) (46%). The number of passengers carried by AirAsia Group and Cebu Pacific (CEB PM, NR) fell 2% q-o-q owing to weaker travel demand in the region and the scaling down of capacity among carriers. We have yet to include the potential partial contribution from AirArabia (AIRARABI DFM, NR)’s “Tune Protect”, which commenced in May this year.

Potential tie-up with Dubai firm may have significant bearing.Yesterday, Tune Ins signed a memorandum of understanding (MOU) with His Excellency Jamal Al Hai’s unit, Al Hai LLC, that will entail exploring and potentially developing competitive insurance products and reaching out to customers via various touch points. This may involve striking up alliances with strategic partners in United Arab Emirates. The JV may be named Tune Alhai LLC, and operations could commence in 1-3 months. We believe the MOU may be significant as Jamal Al Hai, who has >24 years’ experience in airport operation, is a prominent figure in the local aviation industry. He is the deputy CEO of International Affairs in Dubai Airports, which aims to form an interdependent aviation industry in Dubai.

Maintain forecasts.We have not incorporated any contribution from Osotspa Insurance (OSI) or potential customer switch following the recent aviation disasters, which may boost the passenger numbers of its airline partners. We expect a better 2H, driven by AirArabia, a small boost in travel take-up rate, and better margins from the company’s Malaysian non-online subsidiary. A sensitivity analysis suggests that every 1% change in take-up rate could affect its profit by 2%.

BUY. We lift our FV to MYR3.00, pegged to a 24x FY15F P/E (at a premium to the sector’s 14-20x), from MYR2.60 (22x P/E). We are positive on the MOU as it could propel Tune Ins to be a global player. The growth stock’s valuations are supported by its swift expansion and growing number of partnerships (Air Arabia, OSI and Cebu Pacific). Its diversification awayfrom AirAsia is pivotal to our BUY call.

Contributions from Malaysia continue to decline, in line with the company’s regional expansion strategy

Brief profile of Jamal Al-Hai.Jamal Al-Hai is the deputy CEO of International Affairs and Corporate Communications of Dubai Airports, an airport operator. He has over 24 years of experience in the group. Jamal Al-Hai is also a key founder of Marka, which was listed on the Dubai Financial Market in April 2014 and focuses on fashion retail outlets, according to online sources.
Further biography information can be found via this link /servlets/staticfile/244422.jsp

Source: RHB