Results Review

• TUNEPRO’s 9MFY19 core net profit of RM37.4mn came in below expectations, accounting for 67.3% and 60.5% of ours and the street’s fullyear estimates. The variance was mainly due to lower-than-expected gross written premium and net earned premium as a result of on-going motor mitigation plan and lower-than-expected premiums contribution from non-motor portfolio.

• YoY, 9MFY19 core net profit decreased 3.3% due to lower net earned premiums from both general and travel insurance businesses. The net earned premium of its general insurance unit in Malaysia, Tune Protect Malaysia (TPM), dropped 13.1% to RM118.8mn due to on-going motor mitigation plan.

• Meanwhile, the net earned premium of Tune Protect Re (TPR) decreased by 15.0% to RM71.1mn due to weaker demand and the change of travel insurance premium retention rate between TPR and TPM. Overall, the gross written premiums fell 16.0% to RM349.1mn while the combined ratio surged by 5.7%-pts to 97.4% mainly driven by higher management expenses arising from higher advertising cost.

• QoQ, 3QFY19 core net profit dropped by 16.8% to RM8.7mn due to lower net earned premium and investment income. The net earned premium fell 2.5% to RM61.6mn while the gross written premium decreased 15.3% to RM106.1mn, due to on-going motor mitigation strategy.

Conference Call Highlights:

• The group had recently introduced a flight delay instant notification feature for its Vietnam and Indonesia customers. Once the passengers receive the notification of flight delay, a link will be sent to them via email or SMS in order for them to key in bank details for instant claim.

• The group had also recently introduced travel takaful insurance for Airasia flights departing from Indonesia.

• Management guided that dynamic pricing had successfully to contributed about 6.0% to AirAsia’s gross written premium in 3Q2019.

Impact

• Following the weaker-than-expected results, adjustments are made to reflect lower take-up rate in travel insurance. In addition, we also lower our FY19 to FY21 growth rate assumptions for gross written premium for general insurance from 6.0%/6.2%/6.5% to 5.0%/5.4%/5.8% respectively. All in, earnings forecasts for FY19/FY20/FY21 were cut by 13.0%/12.4/10.0% respectively.

Outlook

• The general insurance sector is expected to remain challenging due to intense price competition and high claims ratios especially for the motor segment. Despite the on-going challenges, we are in view that TUNEPRO could be one of the potential beneficiaries from Visit Malaysia Year 2020 campaign as the government targets to bring in 30mn international tourist arrivals. This may help to boost the demand for travel insurance.

Valuation

• After revising the earnings forecasts, the target price for TUNEPRO is revised downward to RM0.70 (previously RM0.87), based on 0.9x CY19 P/BV (previously 1.1x). The reduction in P/BV multiple is to reflect the potential weaker outlook of overall general insurance sector in 2020 as a result of intense price competition, and persistently high medical and motor claims costs. In addition, the decision to fully liberalise the fire insurance, which will be decided in 2020, might potentially lead to stiffer competition and increased pressure on underwriting margins. However, we maintain Buy call on the stock as the dividend yield remains attractive.

Source: TA Research - 22 Nov 2019