MNRB’s 1HFY14 met expectations, with net profit surging 76% y-o-y on improved general reinsurance performance. We assign a higher FV of MYR3.25 (from MYR3.15) after rolling over valuations to FY15. Maintain SELL, however, given: i) persistent retakaful underwriting losses, ii) lower takaful margins, and iii) potential need to provide up to MYR32m in claims exposure from Typhoon Fitow in 2HFY14.

- Great 2QFY14 profit from general reinsurance. Although MNRB’s MYR67m 1HFY14 earnings made up 56% of our full-year forecast (typically 1H makes up <50% of full-year net profit), we consider the results to be in line with expectations due to potential lumpy claims provisioning in 2HFY14 (see below). Its core segment, the general reinsurance business (Malaysian Reinsurance Bhd, or Malaysian Re), saw a 121% surge in profits on an improvement in claims experience (55% claims ratio vs 1HFY13: 61%). Commission and management expenses at group level improved slightly from 1HFY13.

- Not yet a turnaround story. Elsewhere, MNRB’s takaful subsidiary (Takaful Ikhlas SB) was impacted by flattish growth in revenue and underwriting deficits (-0.2% margin vs 1HFY13: +10.8%). Losses increased in the retakaful segments on higher provisioning reserved for claims.

- Still projecting a gloomy outlook. Despite Malaysian Re’s strong results, MNRB’s risks moving forward remain high. It disclosed that its reinsurance subsidiary may be exposed up to MYR32m in claims from the destructive effect of Typhoon Fitow, which made landfall in China’s Fujian Province on 7 Oct.

- Maintain SELL. We leave our forecast unchanged, but roll over valuations to FY15. This nudges up our FV to MYR3.25 (from MYR3.15), pegged to 0.6x P/BV, at a discount to regional reinsurers’ 1x P/BV. We see an absence of a turnaround story, as diversification from its core reinsurance business is lacking, increased YTD gearing to 21% from 17.9% in FY12, persistently high double leverage ratio at 148% (FY12: 147% and leverage (at company level) of >50%, and more claims provisioning potentially for the higher frequency of recent catastrophic events in the Asia-Pacific region. Recall that the stock dropped <MYR3.00 back in FY12 (below its -1SD P/BV) on the abnormally high MYR118m provisioning made for claims exposure to Thailand’s floods.

Risks. Recall that the stock dropped under MYR3.00 in FY12 (below its -1SD P/BV) due to the abnormally high provisioning of MYR118m made for its claims exposure to Thailand’s floods. While the MYR32m claims exposure to Typhoon Fitow is nowhere near as large as that, we remain concerned on potentially more claims provisioning needed for the higher frequency of catastrophic events that have impacted the Asia- Pacific region recently.

Source: RHB