We deem Tune Ins’ 1H14 net profit of MYR34m in line, at 43% of our and street  estimates.  While  1H14  was  hampered  by  MMIP  provisioning, start-up losses from  Cozmo Travel and higher expenses, we view these as  temporary  and expect  a better 2H14  owing to market expansion and growing  associate income.  Maintain BUY  and  MYR3.00  FV  (24x FY15F EPS) on the company’s swift expansion into a global player.

• 1H14 net profit up 11%.  Tune Ins’ 1H14 net profit grew  11%  y-o-y  to MYR34m  on the back of  17% y-o-y revenue growth.  Gross online  travel insurance  premium  rose  to  MYR47m  (2Q14:  MYR22m)  while  its bottomline surged 21% to MYR29m, buoyed by an 8% increase in online policies to  3.9m.  This is  consistent with the ~15% passenger growth  we forecast in  our  7 Aug  Earnings  Preview  Tune Ins Holdings -  Diversifying Away From AirAsia. Tune Insurance Malaysia’s (TIMB) margin fell due to the absence of  the  Malaysian Motor Insurance Pool (MMIP) tax relief  it received  in  1H13.  Excluding  a  MYR5m  provisioning,  the  company’s 1H14 net profit would have stood at MYR39m, in line with our forecast.
• Maiden contributions from Air Arabia and OSI.  Travel insurance  from Air Arabia  (AIRARABI DFM,  NR), which  started  contributing  in May  this year  through Cozmo Travel,  was recorded as joint venture  (JV)  income . It  sold  more  than  24k  policies.  Tune  Ins’  49%-owned  Thailand  unit, Osotspa Insurance  (OSI),  also made  a first-time contribution, chipping in MYR0.3m of associate income during the quarter.
• Expect a  better, more diversified 2H14.  Losses were recorded in the JV  business  with Air Arabia, which  we believe may turn in  a profit  upon an increase in take-up rates  and the  scale of its  business. TIMB  expects a  MMIP  cash  call in  2H14,  which  should provide  a  tax  relief  similar  to 1H13’s MYR2.7m. We expect better travel demand  in 2H  as  1H14  was dampened  by  weak  regional  travel  demand,  while  stronger  customer awareness  of  travel  risks  may  bolster  take-up  rates  going  forward.  A sensitivity analysis suggests that every 1% change in take-up rate  could affect  its  profit by 2%.  Also, we expect  full income to  stream  in  from  the Middle  East  operations  and  OSI,  which  plans  to  launch  new  travel insurance policies in Thailand by 2H14.  All said,  we believe  2H14 may see  positive  news  flow  on  Tune  Ins’  potential  partnerships  with  key aviation players in Dubai and outside Malaysia.
• Maintain  BUY  and  MYR3.00  FV,  pegged  to  a  24x  FY15F  P/E  (at  a premium  to  the  sector’s  14-20x),  as  the  growth  stock’s  valuations  are supported by its swift expansion and growing number of partnerships (eg Air Arabia, OSI and Cebu Pacific). Its diversification away from AirAsia is pivotal to our BUY call. We retain  our forecasts  pending more details  on costs and associate recognition at Tune Ins’ briefing today.

Catalysts. We believe that tie -ups with global partners are fundamental to expansion of Tune Ins’ reach from an Asean insurer to a global  one. Its  JV  with Cozmo Travel allows  it  to  directly  tap  into  the  Middle  East,  Africa  and  Europe  markets.  A  better topline performance from TIMB could provide upside to our forecasts.  

Risks.  A surge in online claims ratio, competition,  as well as weak marketing may hurt take-up rates. A prolonged tourism slump in Thailand could hurt travel demandwhile any strategic stake selldown by the company’s main shareholders may present an opportunity to accumulate.

Source: RHB