Yesterday, Tune Ins announced a MYR22.8m acquisition of ASM,marking its second M&A attempt in Indonesia and a potential second subsidiary for the company. Maintain BUY on this growth stock, with our TP at MYR2.70 (51% upside). We conservatively estimate <5% net profit accretion on a higher retention of travel insurance (TI) in Indonesia (a key market), excluding the local business.

• A second subsidiary, after Malaysia’s Tune Insurance Malaysia (TIMB). On 5 May, Tune Insurance Holdings (Tune Ins) executed a conditional binding offer letter to acquire 50% plus one share equity interest of PT Ansuransi Staco Mandiri (ASM), a small general insurer in Indonesia established in Feb 1990. Despite its small size, this marksTune Ins’ strategic penetration into Indonesia’s local general insurancemarket – ASM has a shariah business and is 63%-controlled by Dana Pensiun Bank Mandiri Dua. The total purchase consideration of IDR82.9bn (MYR22.8m) implies 1.5x-1.6x P/BV, based on FY14 net assets of IDR103.6bn (MYR28.5m). In our view, this is reasonable vs the 2x P/BV acquisition multiple in the region, and in line with the 1.7x P/BVof Tune Ins’ acquisition of its Thailand associate (announced a year ago) and 1.2x of the TIMB acquisition in 2012. This is its second M&A attempt in Indonesia, its first being PT Batavia Mitratama Insurance – which was at a more expensive 2.3x P/BV. It aims to complete the acquisition within three months. The acquisition will be funded mainly by IPO proceeds.
• Earnings accretion. We believe ASM will offer Tune Ins a direct underwriting of TI, as Indonesia is a key market (after Malaysia and Thailand) contributing 11% of its earned TI policies, and access to bancassurance partnerships and direct channels in the country. ASM is already profitable, with MYR1.2m earnings in FY14. Assuming an extra 15% retention (from 70% currently) on Indonesia’s TI, but excluding the local business contribution, we expect a <5% accretion to FY15F-17F net profit. We retain our earnings forecasts for now.
• BUY, with a MYR2.70 TP (24x FY15F P/E). Tune Ins is a growth stock when put against the sector’s valuations of 14-20x P/Es, supported by swift expansion and more acquisitions and partnerships. Its TI is a proxy to global passenger demand. Diversification away from AirAsia (AIRA MK, BUY, TP: MYR3.39) would also be pivotal in supporting our call.
• Risks. A surge in online claims ratios, competition and prolonged weak regional travel demand may hurt the growth of its travel insurance business. For the acquisition, regulatory approval from both Bank Negara Malaysia and Otoritas Jasa Keuangan are needed. CEO Junior Cho, being cognisant of the hurdles in past M&A exercises, is in constant talks with the regulators. As Tune Ins is still in a growth phase, expenses could also be higher than expected.