FY14’s MYR73m  earnings  met  our  but  was  ahead  of  street  estimates. Maintain  BUY  with  an  adjusted  MYR2.70  TP  (24x  FY15F  EPS,  37% upside). Tune weathered through weak travel demand, airline incidents and operational issues in 2014 but, despite forecasting lower margins, we continue to see above-industry growth from new partnerships, swift expansion of travel insurance and improved associate income.  
 
FY14  net  profit  (+7%  YoY).  In  line  with  our  but  ahead  of  consensus expectations  at  96%  (our)  and  111%  (street)  of  estimates.  Tune Insurance’s (Tune) bottomline growth was in line with: i) 11% net earned premium  growth  and  7%  YoY  passenger  growth  (see  our  18  Feb earnings preview  Tune Ins : Strong 4Q Seasonal Demand Reaffirmed), ii)  positive  half-year  contributions  from  a  Thai  joint-venture  (JV)  and Middle  East  North  Africa  (MENA)  associate,  and  iii)  Tune  Insurance Malaysia’s  (TIMB)  8%  4Q14  underwriting  (UW)  margin  (3Q14:  5%). While Tune faced challenges in 2014 that caused its UW margins to drop by  500bps  to  17%,  4Q14  was  a  strong  period  of  recovery  as  its  travel insurance business thrived.  

Key  2014  challenges  –  weak  ASEAN  travel  demand  and  airplane incidents.  In  3Q14  and  4Q14,  Tune  recorded  lower-than-normal  travel insurance take-up rates due to AirAsia’s (AIRA MK, BUY, TP: MYR3.39) online  booking  engine  issues  (Jul-Dec  2014).  2H14  also  saw  lumpy fire/medical claims (TIMB) and net MYR1m claims exposure to the East Coast floods. Management expenses surged  on a union and employee benefits one-off settlement, and new business units marketing costs. Its 3.7% investment yield (FY13: 4.8%) was on a lower-risk portfolio.  

Outlook  and forecast changes.  FY15  is  set to  be  a  better  year  on:  i) recovery in travel demand (the take-up rate will normalise post Jan 2015 after  the  online  booking  engine  issue  is  fixed),  ii)  a  lower  reinsurance rate on its motor segment to 10% (from 10-25%) with Munich Re as the group  is  able  to  afford  higher  retention  on  a  leaner  motor  portfolio,  iii) Tune is still eyeing partnerships and an Indonesian acquisition (a mid to 3Q15 target). We cut our FY15F/16F earnings by 11%/14% respectively
to  reflect  a  higher  commission/management  expenses  ratio  as  Tune  is still  expanding.  It  could  face  further  margins  challenges  in  FY16  with industry detariffication. We also forecast for higher income from JVs and associates as the breakeven was sooner than expected.  

Maintain  BUY  with  a  MYR2.70  TP  (from  MYR3.00).  This  implies  an unchanged 24x FY15F P/E (a premium to sector valuations of 14-20x), as  it  is  a  growth  stock  supported  by  swift  expansion  and  more partnerships.  Its  diversification  away  from  AirAsia  would  be  pivotal  in supporting our call.

Catalysts. Tie-ups with global partners are fundamental to expand Tune’s reach from an  ASEAN  insurer  to  a  global  insurer.  Its  joint  venture  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. Meanwhile, a prolonged tourism slump in Thailand could hurt travel demand.  Any  strategic  stake  sell-down  by  the  main  shareholders  also  presents opportunities to accumulate.

The key focus areas mentioned in its analyst briefing were:  
i.  TIMB: Higher retention rate  by reducing  the motor quota share agreement with reinsurers. We understand that it intends to resume motor reinsurance of just 10% with Munich Re compared with mix of 10-25% with both Munich Re and Swiss Re last year.  
ii.  TIMB: Additional new franchise dealers.
iii.  TIMB: Increase agency force by 400 new agents.
iv.  JV/associates:  To  expand  market  coverage  and  destinations,  add  new partnerships and distribution partners.  
v.  JV/associates:  For  Thailand,  to  also  expand  into  other  Osotspa businesses.  
vi.  Tune:  Riding  on  the  airline  partners’  new  route  launches,  penetration  of business  with  AirAsia  India,  and  expanding  into  markets  that  it  has  yet  to have a presence in. It expects efforts to capture new partners, the Indonesia acquisition and new digital platforms to see progress by mid-2015 to 3Q15.
vii.  Tune: Expand into new markets and long-haul destinations for AirAsia and Cebu Pacific.
viii.  Tune:  Increase  take-up  rate  to  upwards  of  25%  through  more  active marketing campaigns.

Financial Exhibits

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

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

Financial Exhibits

Tune's repayment of MYR133m in borrowings (for business expansion via TIMB) could result in zero gearing

Company Profile

Tune Insurance (Tune), 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.

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Source: RHB