9M14 profit of MYR50m, at 63% of our and street estimates, was below expectations due to lumpy claim items and lower earned travel policies from  slow  international  travel  growth.  Maintain  BUY  and  MYR3.00  TP (24x  FY15F  EPS,  44.9%  upside).  We  lower  our  FY14  earnings  forecast by  6%.  However,  we  believe  these  are  just  temporary  setbacks  and should not hamper Tune Ins’ swift expansion into a global player.  
 
9M14 net profit was below expectations (+6% growth), at 63% of our and  consensus  estimates.  Online  travel  insurance  charted  MYR41m  in PAT.  However,  travel  policies  issued  (at  5.8m  policies)  had  flattish growth YoY despite ~15% passenger growth as per our 12 Nov earnings preview  titled  “Tune  Ins:  Rejuvenating  Its  Multi-Channel  Growth”. Another  culprit  for  the  lower-than-expected  bottomline  was  the  non-online  Tune  Insurance  Malaysia  (TIMB)  unit.  Despite  its  stronger premium growth, TIMB posted a mere 5% underwriting margin amid two large  fire  claims,  new  business  strains  and  higher-than-budgeted medical  claims  from  two  accounts.  The  tax  benefit  from  the  Malaysian Motor  Insurance  Pool’s  (MMIP)  tax  relief  was  not  enough  to  smoothen the impact (a provision of MYR5m was made YTD). All in, the combined ratio surged by 650bps to 79.7% vs 9M13’s 73.2%. We estimate that 9M profit margin for travel insurance remained relatively intact at ~50%.  

Full  contributions  from  joint-venture  (JV)  and  associates.  We  find comfort in knowing that Tune Ins’ ventures  are now fully contributing to profits. QoQ, contribution from its Thai associate surged by MYR2m. The Air Arabia (AIRARABI DFM, NR) Middle East JV generated profit in the quarter of MYR130,000.  

Forecast changes. We lower our FY14 earnings forecast by 6% to take into account the higher combined ratio (we adjusted our net claims ratio higher to 40% from 38%). We make no changes to our FY15 forecast at this  juncture, pending management’s briefing today.  4Q  is  typically  a strong  quarter  for  the  group  due  to  higher  travel  demand,  and  the possible release of reserves for certain insurance premium in 1H14. The group surpassed our estimates in its 4Q13 results last year.  

Maintain  BUY  and  MYR3.00  TP,  pegged  to  a  24x  FY15F  P/E  (at  a premium  to  sector  valuations  of  14-20x),  as  it  is  a  growth  stock  with valuations  supported  by  a  swift  expansion  and  more  partnerships  (Air Arabia,  Osotspa  Insurance  and  Cebu  Pacific).  We  believe  the  high combined ratio in 3Q14 results was caused by lumpy loss items that are merely temporary setbacks and should not hamper the stock’s long-term prospects.  Diversification  away  from  AirAsia  (AIRA  MK,  BUY,  TP: MYR2.73) is pivotal to supporting our call.

Catalysts.  Tie-ups  with  global  partners  are  fundamental  to  expanding  Tune Ins’ reach  from  an  Asean  insurer  to  a  global  insurer.  Its  JV  with  Cozmo  Travel  directly allows it to tap into customers from the Middle East, Africa and Europe. Better topline performance from TIMB could provide an upside to our forecasts.  Risks. A surge in online claims ratio, competition as well as weak marketing may hurt its take-up rate. A prolonged tourism slump in Thailand could hurt travel demand. Any strategic  stake  selldown  by  the  main  shareholders  presents  opportunities  to accumulate.

Financial Exhibits

We believe Tune Ins' topline growth will continue to be driven by the strong latent potential of online premiums. For its non-online subsidiary, Tune Insurance Malaysia, boosting bottomline profits remains the focus

We expect Tune Ins’ claims ratio to be better than the industry’s, as we project an increase in the proportion of low-claims online travel insurance premiums vs total premiums. Historically, its online claims ratio stood at 3.6%

Financial Exhibits

Tune Ins' repayment of MYR133m in borrowings (for business expansion via Tune Insurance Malaysia) is expected to result in zero gearing

SWOT Analysis

Re-rating catalysts: 
- Higher-than-expected take-up rate in the online business 
- Better-than-expected improvement in general insurance (GI) claims ratio 
- Higher-than-expected growth in GI premiums, with controlled levels of expenses and claims 
- Potential acquisition opportunities  
- New customer segment 

Company Profile

Tune Insurance Holdings (Tune Ins), an investment holding company, is engaged in the provision of various general and life insurance products  in  the  Asia-Pacific  region.  The  company  offers  a  range  of  online  products, including  travel,  lifestyle  protection,  and guest personal accident insurance.

Recommendation Chart

Source: RHB