Produced by: KAF-Seagroatt & Campbell Securities Sdn Bhd ...ir.chartnexus.com/tuneinsurance/docs/coverage/KAF... · 2013, with a market capitalisation of RM1.0bn. Within three months

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Produced by KAF-Seagroatt & Campbell Securities Sdn Bhd Important disclosures can be found in the Disclosure Appendix

Tune Insurance

Tune in, sit back and enjoy the ride

We like Tune Ins for its highly profitable online travel insurance business, riding

on the fast expansion of AirAsia Group. In addition, we see upside potential from

the rationalisation of its newly acquired general insurance business. As such, we

initiate coverage with a Buy recommendation at RM2.31.

Financial Highlights

FYE Dec (RMm) FY12 FY13E FY14F FY15F FY16F

Gross premiums 215 368 429 488 558

Net earned premiums 158 241 284 327 377

Operating profit 68 79 97 112 128

Pre-tax profit 58 77 95 110 127

Net profit 41 68 81 94 109

EPS (sen) 5.5 9.1 10.8 12.5 14.5

Net yield (%) - 2.0 1.7 1.9 2.2

PER (x) 35.2 21.3 18.0 15.5 13.4

PBV (x) 10.4 3.7 3.3 3.0 2.6

ROE (%) 29% 17% 18% 19% 20%

Source: Company, KAF

Non-conventional steals the spotlight

An underwriter for life and non-life insurance, Tune Ins operates through its online business

and 83%-owned TIMB. Its niche in the online business allows for products to be offered

competitively due to lower distribution cost. Coupled with the low claims nature of travel-

related insurance, the online business offers lucrative margins. Despite constituting only 26%

of the group’s revenue in FY13, the segment made up 78% of its profit after tax.

Riding along the skies

The group’s exclusive relationship with AirAsia (AIRA MK, RM2.53, BUY) puts it in a sweet

spot to ride on the booming air travel demand in the region, in our view. Tune Ins has also

entered into new tie-ups with external partners like Cebu Pacific (CEB PM, 46.20PHP, NR)

and Cozmo Travel. Aside from generating revenue from travel insurance, the company is

also able to tap into its partners’ extensive databases to market its traditional general

insurance products, thus providing upside potential for TIMB.

Good earnings prospects

We project healthy 17% earnings CAGR in FY13-16F, driven by good premium growth and

higher underwriting margins from both online and general insurance. The former is tied to our

strong passenger growth expectation for AirAsia while the latter should see a steady decline

in claims ratio, as the group continues to drive its portfolio mix away from the motor segment.

Initiate coverage with a Buy recommendation at RM2.31

We initiate coverage of Tune Ins with a Buy at RM2.31. Our GGM valuation assumes a COE

of 9.9% and growth rate of 6.5%. While valuations of 18x 2014F PER and 3.3x PBV are

admittedly on the high side, we believe this is supported by good value creation and healthy

growth prospects. The stock also offers the best liquidity amongst insurance stocks in

Malaysia. While net yields of 1-2% are low, we see dividend growth potential given our

strong earnings expectations as well as the possibility of a step-up in payout once the wider

regional footprint has been established.

31 March 2014

Analyst

Joanna Cheah

+60 3 2168 8097

[email protected]

Performance

1M 3M 12M

Absolute (%) 8 1 38

Rel market (%) 7 1 24

1.20

1.40

1.60

1.80

2.00

2.20

2.40

Feb 13 Feb 14

TIH MK KLCI

Source: Bloomberg

Market data

Bloomberg code CIMB MK TIH MK

No. of shares (m) 751.8

Market cap (RMm) 1,458.4

52-week high/low (RM) 2.17 / 1.38

Avg daily turnover (RMm) 1.4

KLCI (pts) 1,850.73

Source: Bloomberg

Buy

Price

RM1.94

Target price

RM2.31

Valuation

Target price (RM) 2.31

Methodology GGM

Key assumptions ROE = 19.7%

COE = 9.9%

g = 6.5%

Implied FY14 PE (x) 21.4

Implied FY14 PBV (x) 3.9

Implied FY14 Yield (%) 1.4

Source: KAF

Produced by: KAF-Seagroatt & Campbell Securities Sdn BhdDistributed by: Jefferies Group LLC

31 March 2014

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts onpage 19 of this report.

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Joanna Cheah*(603) [email protected]

* KAF-Seagroatt

2

Non-conventional steals the spotlight

Tune Insurance Holdings Berhad (Tune Ins) made its debut on Bursa Malaysia on 20 February

2013, with a market capitalisation of RM1.0bn. Within three months of listing, the stock had

appreciated by 61% to a high RM2.17 in May 2013. It has since retraced to RM1.94 but is still

44% above its IPO price.

The group is an underwriter, both directly and via reinsurance, of general and life insurance

products across the Asia Pacific region. The two core main segments of the group are online

insurance business and general insurance.

(1) Online insurance business

The group’s online insurance business centres on its strategic partnerships with the AirAsia

Group, AirAsia Expedia and Tune Hotels.

Chart 1 : Share price performance since listing

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14

RM

Source: Bloomberg

Chart 2 : Tune Insurance’s corporate structure

Source: Company

3

Essentially, Tune Ins offers products to customers as part of their online booking process of either

flights (via AirAsia), hotel rooms (via Tune Hotels), or travel-related services offered by Expedia in

any country with which the broader Group has established arrangements. If a customer opts to

purchase the additional insurance, it is subsequently bundled together as part of the main

booking process, with the customer paying one overall fee. The customer only needs to use one

set of registration information.

As the group does not currently have insurance licenses outside Malaysia, any policies

purchased by customers, depending on the origin of flight, will be underwritten by its local

insurance partners. The local insurance partners, in turn, will reinsure part of these exposures (on

a predetermined basis but typically 30:70, according to management) back to the company’s

reinsurance entity, Tune LifeRe or Tune GenRe. Where necessary, the group will reinsure a

portion of its underwriting exposure to external reinsurance agents.

Chart 3 : Illustration of Tune Insurance’s online business model

Source: Company

Chart 4 : Tune’s regional reach through online insurance

Source: Company

4

Some of the core products being offered via its partners’ websites currently are:-

travel insurance, sold to customers of AirAsia and branded as the “Tune Insure Travel

Protection Plan” (previously dubbed AirAsia Insure Travel Protection Plan)

lifestyle protection insurance, namely the AA Lifestyle Protection Plan and the Tune

Hotels Lifestyle Protection Plan

guest Personal Accident insurance for Tune Hotels

travel insurance, sold to customers of AirAsia Expedia, and

Skybus protection plan (for personal accident, luggage demand and losses) for AirAsia

customers who purchase Skybus tickets online

The relationships between Tune Ins and its online partners are protected by distribution

agreements over a period of 5-15 years with the option to be renewed upon terms and conditions

mutually agreed by the parties. A key risk, in our view, is unfavourable terms to Tune Ins upon the

expiry of its existing agreements. As for AirAsia Expedia, Tune Ins is currently the non-exclusive

insurance manager and has begun marketing its line of products through three of Expedia’s

websites in Asia, increasing the potential customer reach.

Through the tie-up arrangements, Tune Ins issued 6m policies in 2012 and 8m policies in 2013.

The group has continued to register growth in markets outside Malaysia. In FY13, 47% of its

policies were booked in Malaysia while the remaining 53% were from Thailand (19%), Indonesia

(15%), Singapore (5%), China (8%) and others (6%).

Chart 5 : Product offerings of Tune Ins’s online insurance business

Source: Company

Table 1 : Exclusive long-term arrangements with the AirAsia Group and Tune Hotels

Online Partners Period Expiry

AirAsia Bhd 10 2022

AirAsia Japan 10 2022

PT Indonesia AirAsia 15 2027

AirAsia X 15 2027

AirAsia Inc 15 2027

Thai AirAsia 5 2017

Tune Hotels 10 2022

Source: Company

5

Not resting on its laurels, Tune Ins successfully entered its first strategic partnership in May 2013

beyond its current arrangements with the AirAsia Group, Tune Hotels and AirAsia Expedia. The

group now manages travel protection plans for all inbound flights to the Philippines, on behalf of

Malayan Insurance CO (MICO), Cebu Pacific’s insurance product manager.

More recently, in January 2014, the group entered another joint venture with Cozmo Travel, a

travel agency in the UAE, to manage the travel insurance business of Cozmo and its group

affiliates. This will be Tune Ins’s first foray outside of Asia Pacific. Management is optimistic about

the insurance and travel potential associated with the MENA market and believes it could

contribute meaningfully to the group’s bottom-line over time.

(2) General insurance business

The general insurance business for the Group was established in May 2012 through the

acquisition of its currently 83.3%-owned subsidiary Tune Insurance Malaysia Berhad (TIMB).

TIMB was formerly known as Oriental Capital Assurance Berhad (OCA).

OCA had a 35-year history as a general insurance provider in Malaysia. The company was

plagued by losses in the past due to the risky and unprofitable nature of the motor segment which

the group primarily underwrites. In addition, the other segments which the group underwrote such

as marine, oil and gas, and energy classes were characterised by rate reductions and softening

prices, resulting in underwriting losses. After three consecutive years of reported losses, OCA

subsequently swung back to profitability in 2009. Based on Tune Ins’s total acquisition cost of

RM163m for its 83% stake, this translates into approximately 1.2x PB and 7.5x PER, using OCA’s

2011 book value and net profit.

The products offered include the aforementioned AirAsia and Tune Hotels products as well as

other traditional general insurance products as set out below:-

Motor

Fire

Marine

Medical Health & Dental

Personal Accident

Engineering

Foreign Workers

As at 31 December 2013, TIMB had 1,138 agents. The group’s portfolio mix during the year was

predominantly Motor (34%), followed by Personal Accident & Medical at 24%, Marine at 21% and

Miscellaneous at 12%. The proportion of fire insurance was small at only 9% of the total gross

Chart 6 : Geographical breakdown of policies in FY13

Thailand, 19%

Singapore, 5%

China, 8%

Others, 7%

Indonesia, 15%

Malaysia, 46%

Source: Company

Chart 7 : Geographical breakdown of policies in FY12

Thailand, 19%

Singapore, 6%

China, 5%

Others, 6%

Indonesia, 13%

Malaysia, 51%

Source: Company

6

premiums, although this has expanded from 6% in 2012. Meanwhile, although motor is still the

largest component of premiums, its significance has narrowed from 49% in 2012.

The group’s strategy is to rebalance its portfolio away from the motor business to more profitable

segments particularly the fire, marine and engineering segments. Management has identified

foreign workers’ insurance as a growth area to tap considering the expected roll-out of mega

construction projects in Malaysia during the next few years.

The group’s acquisition of TIMB is likely the first of several acquisitions planned by the group, in

order to capture higher revenue from underwriting general insurance itself. Management has

indicated plans to acquire local general insurers in countries where AirAsia has a strong

presence, in particular, Thailand and Indonesia. This is to enable them to directly underwrite the

travel insurance, thus allowing for a higher share of profit from each policy underwritten. On 10

March 2014, Tune Ins submitted for regulatory approval to acquire a 49% stake in Osotspa

Insurance, a non-life insurance company in Thailand.

Chart 8 : Portfolio mix, 2013

Motor, 34%

Marine, 21%

PA & Medical,

24%

Misc, 12%

Fire, 9%

Source: Company

Chart 9 : Portfolio mix, 2012

Marine, 17%

Misc, 4%

Fire, 6%

Motor, 49%

PA & Medical,

24%

Source: Company

7

Riding along the skies

Tune Ins’s exclusive relationship with the AirAsia Group and potential new partnerships with other

airlines puts it in a sweet spot to ride on the increasing dominance of low-cost carriers (LCCs), in

our view. Furthermore, the huge database of travellers which the group has access to, serves as

a good platform to expand its general insurance product offerings, without the need to rely too

much on costly agents.

Increasing dominance of low-cost carriers

Southeast Asia continues to experience rapid LCC expansion with LCC penetration rate now

approaching 60%, having steadily increased from just under 5% in 2003.

We believe there is still room for LCC penetration to rise given the rapid economic growth in most

of Southeast Asia as well as the expanding middle class in the region which brings a steady rise

in discretionary income levels. AirAsia is currently Asia’s largest LCC group with an in-service

fleet of 172 aircraft compared to 133 for second place Lion group as at 31 December 2013.

The Group (including AirAsia X) carried a total of 46m passengers in 2013, recording a 25% yoy

growth. Tune Ins had written 8m policies during the year, which translates into a take-up rate of

about 35%. This is an increase from the estimated take-up rate of 33% in 2012 (6m policies

against 37m passengers).

In our view, Tune Ins’s exclusive relationship with AirAsia places it in a unique position to benefit

from the booming air travel demand within Asia-Pacific. Besides Malaysia, this includes the

significant market share captured through Air Asia’s various overseas operations.

Chart 10 : Growing LCC capacity share in Southeast Asia

3.3%4.6% 4.0%

9.8%

13.6%

18.1%

23.2%

26.8%

30.9% 30.7%32.4%

52.0%

57.8% 58.6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jan-Mar

2014

Source: CAPA

Table 2 : Asia Pacific aircraft orders by LCC group as at 31 December 2013

Group Current fleet On order

Lion 133 576

AirAsia / AirAsia X 172 388

Jetstar 116 125

VietJet 10 70

Tigerair 51 18

Source: CAPA

8

According to data provided by CAPA and Innovata, Thai AirAsia had an approximate 27% share

of Thailand’s domestic market, based on the percentage of seats during the week of 19-25 Aug

2013 (Chart 13). In the international market, the combined AirAsia Group accounted for 12%

share of capacity over the same period, second to the 30% share from the Thai Airways Group

(includes Thai Airways and Thai Smile).

As it stands, Indonesia AirAsia (IAA) is the largest Indonesian carrier in the international market

with 17% of seat capacity while the AirAsia Group overall accounts for a 26% share. According to

CAPA, IAA currently allocates 58% of its seats to international routes.

The recent devaluation of rupiah has weakened the domestic travel market and caused erosion of

profitability for IAA, leading the carrier to rebalance its network towards the international market in

2014, or up to 70% of its total seat allocation.

IAA has already unveiled plans for further international expansion, targeting the Hong Kong,

Vietnam and India markets. This, in our view, is a positive boost to Tune Ins as insurance policy

charges for international routes is almost double that of domestic routes (Table 4).

Chart 11 : AirAsia Group’s passenger traffic growth

0

5

10

15

20

25

30

35

40

45

50

2009 2010 2011 2012 2013

m pax

0%

5%

10%

15%

20%

25%

30%yoy growth

Source: AirAsia

Chart 12 : Thai domestic capacity share, 19-25 Aug 2013

Thai Airways,

27.3%

Thai AirAsia,

26.8%

Nok Air, 26.4%

Bangkok

Airways, 18.0%

Business Air,

0.1%

Orient Thai

Airlines, 1.4%

Source: CAPA & Innovata

Chart 12 : Thai international capacity share, 19-25 Aug 2013

Thai Airways,

29.3%

Bangkok

Airways, 2.7%

Others, 47.1%

AirAsia, 2.8%

Emirates, 3.2%

Cathay Pacific,

3.2%

Thai AirAsia,

7.5%

Tigerair, 2.1%

Qatar Airways,

2.1%

Source: CAPA & Innovata

9

Closer to home, the Malaysian market was shaken up in 2013 when rival low-cost carrier Malindo

Air began operations and Malaysian Airlines pursued an aggressive expansion aimed at fighting

off Malindo. Nonetheless, the AirAsia group still dominates market share as at December 2013,

based on passenger movements at the Kuala Lumpur International Airport.

We see further opportunities for the local travel insurance industry in 2014, underpinned by two

key reasons.

Chart 13 : Indonesia international market share, 14-20 Oct 2013

Indonesia AirAsia, 17.4%

Garuda Indonesia, 14.5%

AirAsia, 8.1%

Singapore Airlines, 7.8%Lion Air, 6.4%

Malaysia Airlines, 5.0%

Tigerair Mandala, 4.7%

Cathay Pacific, 2.9%

Others, 33.2%

Source: CAPA & Innovata

Table 3 : Tune Ins’ travel plan rates – online and offline (quoted in RM)

Plan rates Online Offline

Tune Insure One-Way Cover Domestic RM7.50 RM10.50

Tune Insure One-Way Cover Regional RM10.50 RM13.50

Tune Insure One-Way Cover International RM18.00 RM21.00

Tune Insure Return Cover Domestic RM18.00 RM21.00

Tune Insure Return Cover Regional RM23.00 RM26.00

Tune Insure Return Cover International (1-10 Days) RM34.00 RM37.00

Tune Insure Return Cover International (11-30 Days) RM54.00 RM57.00

Source: Company

Chart 14 : Airlines’ market shares in KLIA based on passenger movements

Malaysia Airlines, 32.0%

AirAsia, 24.2%

Others, 55.2%

AirAsia X, 9.3%Jetstar Asia, 1.9%

Cathay Pacific, 2.1%Emirates, 2.7% Indonesia AirAsia, 4.6%

Source: Malaysia Airports

10

Firstly, we expect the intensifying competition among local carriers to continue into 2014. Thus,

fares should stay low. This, in turn, is likely to stimulate demand and potentially result in a higher

take-up of travel insurance, especially in view of recent risks of travel, high cost of overseas

medical treatments and the financial losses incurred from trip cancellations.

Based on passenger traffic numbers reported by Malaysia Airports, 2013 was an exceptional year

of growth, thanks to the emergence of Malindo which had spurred the other carriers to compete

rigorously especially in the domestic space. Domestic passenger movements increased by 20%

yoy while international passenger movements were up 17% yoy, fuelled by Malaysia Airlines’

entry into Oneworld alliance.

Secondly, we expect Visit Malaysia Year 2014 which aims to attract 28m tourists (up 9% from the

26m tourists in 2013), to have a positive spill over effect on number of travellers and

subsequently take-up rates of travel insurance.

Beyond the markets mentioned above, Tune Ins is serving 14 out of the 21 markets in which

AirAsia has a presence. The LCC group will be expanding its network to India in 2014 upon

obtaining its air operator’s permit and potentially re-entering Japan upon securing a new partner.

Meanwhile, Thai AirAsia X and Indonesia AirAsia X are set to commence operations in the latter

half of 2014. AirAsia is also keen to penetrate the North Asia and Australia markets, leaving room

for Tune Ins to expand its reach.

Chart 15 : Passenger movements in 2013

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Domestic International Total

Source: Malaysia Airports

Chart 16 : Tourist arrivals during past Visit Malaysia Years

0.0

5.0

10.0

15.0

20.0

25.0

30.0

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Source: Tourism Malaysia

11

Beyond riding on the growth of AirAsia, Tune Ins has also entered its first tie-up with another

airline, the Philippines low-cost carrier Cebu Pacific. The Philippines carrier is planning a notable

domestic expansion in 2014, which could see the group’s share of the Philippines domestic

market approach 60% from 50% in 2013, according to CAPA.

While we are uncertain at this juncture of the bottom-line impact on Tune Ins given the initial

stages of tie-up (since May 2012), we believe there is good potential over the medium term given

Cebu’s rising dominance and the heightened awareness for the need of travel insurance.

Under-penetrated insurance market

Under the group’s existing distribution agreements with AirAsia and Tune Hotels, it is permitted to

market general insurance products to the customer base of its partners. As at 31 December

2013, Tune Ins has built a substantial database of approximately 8.01m policy-holders. This is a

more cost effective means of reaching potential customers, which also reduces reliance on

agents.

According to an independent report by industry consultant Milliman, general insurance

penetration rates (defined as the percentage of gross total non-life premium over GDP) in

Malaysia, Thailand, Indonesia and the Philippines remain low, hovering below 2%. This is despite

strong GDP growth at a CAGR of 16.5% from 2006 to 2011 in Asia ex-Japan. The corresponding

Chart 17 : Philippines domestic market share, 9M12

PAL Group, 43%

Cebu Pacific,

45%

Tigerair, 1%

AirAsia, 1%

Zest, 10%

Source: Philippines Civil Aeronautics Board

Chart 18 : Philippines domestic market share, 9M13

PAL Group, 34%

Cebu Pacific,

51%

Tigerair, 5%

AirAsia, 10%

Source: Philippines Civil Aeronautics Board

Chart 19 : Non-life insurance penetration, 2012

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Ph

ilipp

ine

s

Ind

on

esia

Vie

tna

m

Ind

ia

Chin

a

Hon

g K

on

g

Sin

ga

po

re

Ma

laysia

Th

aila

nd

Ja

pa

n

Au

str

alia

Ta

iwa

n

Ko

rea

New

Ze

ala

nd

Source: Swiss Reinsurance Company Sigma Reports No.3/2013

12

density rates (i.e. gross non-life premiums per capita) are under US$200, which is much lower

than the mature markets in the region as well as Europe, North America and Japan.

Additionally, findings by Milliman show that insurance penetration could increase at a higher rate

than the per-capita GDP, due to the change of income elasticity of demand for insurance as an

economy matures.

The group’s life insurance business is currently almost negligible, contributing only 0.5% of

operating profit in 2013. Nonetheless, as health care costs and medical inflation continue to exert

significant pressure on both individuals as well as companies offering medical benefits to

employees, we expect this insurance segment to grow and for Tune Ins to capture a higher

market share in the future as the group continues to gain traction with its distribution network. We

note that Tune Ins has existing business relationships with companies like the Petronas Group,

Star Publication, Yinson, Kossan, and Boon Siew Group.

Chart 20 : Non-life insurance penetration of various countries against respective GDP per capita, 2012

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

Source: World Bank, Swiss Reinsurance Company Sigma Reports No.3/2013

13

Good growth potential

Since inception in 2009, Tune Ins has been operating the travel insurance business through its

tie-up with AirAsia. This was then expanded via the acquisition of TIMB in May 2012 which

allowed the group to underwrite a full range of general insurance products directly in Malaysia.

The group’s net earned premiums expanded almost three-fold in FY12 upon inclusion of seven

months consolidation of TIMB. This grew further in 2013, due to strong growth in its online

business as well as a full year’s contributions from TIMB’s portfolio.

Net claims ratio was exceptionally low prior to the TIMB acquisition at about 4%. We believe this

is common to travel type insurance and particularly so for an airline like AirAsia, which is

committed to the punctuality of flight departures. Upon the inclusion of TIMB, the claims ratio has

risen to 39% in 2013.

The combined ratio, which is a good measure of profitability for insurance companies, is

calculated by taking the sum of the incurred losses and expenses and dividing them by net earned

premium. This essentially reflects the proportion of premiums that are charged against operating

costs and claims.

Tune Ins’s combined ratio has been superior to industry at between 38-42% over 2009–2011.

Chart 21 : Breakdown of net earned premiums

full consolidation of TIMB

includes 7 months of

TIMB

0

50

100

150

200

250

300

2009 2010 2011 2012 2013E

RM m

Source: Company

Chart 22 : Net claims and net claims ratio

4% 4%4%

27%

39%

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012 2013E

RM m

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Net claims Net claims ratio

Source: Company

14

Even upon the seven-month consolidation of TIMB in 2012, the group’s combined ratio of 67%

was better than industry average of 89%. 2013 industry numbers are not available for now but

Tune Ins combined ratio has increased to 78%.

Given the ongoing rationalisation of TIMB’s old business, we believe recent numbers are not

reflective of the true potential of the combined group. TIMB was previously known as a motor

insurance provider, but the motor insurance segment has been risky and unprofitable for most

insurers. This is largely due to premiums being regulated and therefore, insurers not being able to

price appropriately for different risk profiles of different motorists.

Post acquisition, we understand that management has taken active steps to restructure its agency

distribution system to improve the channel’s effectiveness in maximising profit margins.

Management plans to reposition itself as a provider of a diversified portfolio of insurance products,

leveraging on its motor insurance customer base to cross-sell a broader range of insurance

products as well as synergising with its online insurance business.

In our view, the combination of TIMB’s traditional business turning around and the strong growth

potential of the lucrative online business should boost underwriting margins moving forward.

Furthermore, net earned premiums on the online policies originating from Malaysia are boosted by the

fact that Air Asia would no longer need to transfer the majority of premiums to an unrelated underwriter.

Earnings expectations

We project an 18% growth in Tune Ins’ net profit in FY14F to RM81m and increases of 16% each

in FY15F and FY16F. Our buoyant expectations are underpinned by the following assumptions

(also refer Table 4):-

We expect overall gross premiums to expand by 14-17% over FY14-16F. The strong growth

from the online business is driven by a combination of robust passenger traffic for the AirAsia

Group, rise in take-up rates of travel insurance as well as a modest increase in average

premium per policy (assuming an increasing mix of premiums for international routes). For

general insurance under TIMB, we project a 5% annual increase. Over the past four years,

earned premiums for TIMB have grown between 1-8% p.a.

We expect the group’s overall net claims ratio to decline gradually as the online business

continues to outpace the legacy general insurance business. Under its general insurance

portfolio, management has guided that they will continue to steer the portfolio mix away from

the high claims motor segment and focus more on fire, engineering and marine insurance.

We assume a flat investment ratio (investment income against net earned premiums) of 11%

during FY14F-16F. The group is looking to generate steady investment income primarily via

wholesale funds.

A dividend payout of 40% is assumed, in-line with management’s guidance to pay out at least

40% of its net profit.

Chart 23 : Tune Ins’s combined ratios vs industry average

42%38% 38%

67%

78%

91% 92%90% 89%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013

Tune Ins Industry

Source: Company, Bank Negara

15

As our earnings expectations for the group heavily depend on AirAsia’s expansion, we are mindful

of the potential risks of over-relying on the latter. Under the new Financial Services Act 2013,

Bank Negara limits the ownership of an individual to not more than a 10% stake in an insurance

company. Common founders, Tan Sri Tony Fernandes and Datuk Kamarudin currently each own

an effective 18% stake in Tune Ins through the Tune Group, Tune Money and AirAsia. We

understand that they have been given a time frame of five years to comply. Thereafter there could

be risks of renewal of exclusivity in the partnership agreements expiring from 2017 to 2027.

Nonetheless, we are comforted to see the group’s continuous efforts to build new tie-ups with

other airlines and online partners to reduce its dependency on the AirAsia Group. Furthermore,

management intends to seek opportunities to acquire businesses with the relevant licenses in

other core markets in Southeast Asia. We have yet to factor in any incremental revenues from

their bigger share of underwriting.

Other key risks to our estimates include any unforeseen natural calamities or severe pandemics

which could affect air travel. As the group currently relies on tie-ups with local insurance partners,

unfavourable changes to negotiation terms could impact Tune Ins. We understand that the current

arrangements with local insurance partners are subject to renewal annually. The group is also

exposed to exchange rate fluctuations given the wide geographical reach of its business. There

are no plans to enter into any hedging contracts to protect itself against forex volatility, according

to management. Lastly, as the insurance industry is tightly regulated by Bank Negara, any

changes in regulations such as capital adequacy requirements may adversely impact Tune Ins’s

profitability.

Table 4 : Key assumptions

Year to December 2013 2014F 2015F 2016F

Performance indicators

Retention ratio 66% 66% 67% 68%

Net commission ratio 15% 15% 15% 15%

Net claims ratio 39% 38% 37% 37%

Management expenses ratio 24% 25% 25% 26%

Investment ratio 11% 11% 11% 11%

Underwriting margin 35% 35% 36% 37%

Growth

Earned premiums

-Online insurance 44% 48% 31% 28%

-TIMB 2% 5% 5% 5%

Online growth assumptions:

-Travel insurance policies written (m) 8.0 11.5 14.6 18.2

-from AirAsia Group n/a 10.5 13.6 17.1

-other tie-ups n/a 1.0 1.1 1.1

-AirAsia Group's passenger traffic (m) 45.8 57.2 70.4 84.4

-AirAsia Group's passenger traffic growth 25% 25% 23% 20%

-Online take-up rates 35% 37% 39% 41%

-Average premium per policy (RM) 17.2 17.7 18.2 18.7

Profitability

Return on average assets 7% 7% 8% 8%

Return on average equity 25% 19% 20% 21%

Dividend payout ratio 42% 40% 40% 40%

Source: Company, KAF

16

Tune in, sit back and enjoy the ride

Tune Ins currently trades at 18x 2014F PER and 3.3x PBV. While these are above the average

valuations of its global peers at 16x 2014F PER and 2.1x PBV, we believe it is justified by the

group’s higher ROE and strong growth prospects. Current ROE is 18% versus the industry

average of 15% while we expect the company to generate an EPS CAGR of 17% over the next

three years versus industry’s growth expectation of just 7%, based on Bloomberg consensus

estimates.

Furthermore, we believe Tune Ins’ business model is unique compared to traditional general and

life insurance businesses. Its online insurance business model is easily scalable and centred on

exclusive arrangements with various renowned partners in the region. Moreover, we believe it is

exposed to a growing market segment where not only is penetration of low cost air travel across

the region relatively low but the proportion of travellers opting for travel insurance, we believe,

could also increase.

The closest comparable, in our view, is the Cover-More Group (CVO AU, AUD2.12, Non Rated),

which is a travel insurance and medical assistance provider in Australia. Cover-More trades at 21x

PER on 2014 estimates, a premium to Tune Ins with lower projected ROEs and lower three-year

EPS CAGR, based on Bloomberg estimates.

We initiate coverage of Tune Ins with a Buy recommendation and RM2.31 target price, providing

19% potential upside from the current price. Our positive recommendation is predicated on the

following:-

A unique business model – We like Tune Ins’s niche in the online space due to three key

reasons: (1) It gives the group an edge in offering products at competitive pricing due to its

lower distribution cost; (2) The online insurance business which is predominantly travel

policies generally experiences low claims ratios; (3) The scalable business model allows the

group to tap into other providers using online means to distribute their products, whether

locally or regionally. It can also generate incremental revenue by leveraging on its partner

AirAsia’s captive customer base.

Proxy to booming LCC travel – Along with the increasing dominance of low-cost carriers,

we believe Tune Ins offers exposure to the booming air travel demand through AirAsia,

which currently commands the biggest LCC market share in the region. At the same time,

Tune Ins does not have to take on inherent fuel risks and declining passenger yields as the

airlines. In fact, increased competition among carriers could actually benefit Tune Ins as low

fares stimulate demand and more travellers, resulting in increased online insurance take-up

rates.

Good earnings growth outlook – We project group earnings to grow at a CAGR of 17% in

FY13 and FY16. We expect the online travel insurance business to be the main earnings

driver. We also see potential upside over the medium term from more profitable traction in

non-travel segments.

Table 5 : Global peer comparison

Company PER PB ROE Dividend yield 3-year EPS CAGR

2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2013E-2016F

BANGKOK INSURANCE PCL 24.3 24.3 1.6 1.5 9.5% 10.1% 2.5% 2.5% -6%

LPI CAPITAL BERHAD 17.0 15.1 2.2 2.1 13.4% 13.9% 4.7% 5.1% 7%

SAMSUNG FIRE & MARINE INS 12.7 11.0 1.2 1.1 9.5% 10.2% 1.9% 2.1% -10%

AUSTBROKERS HOLDINGS LTD 19.0 17.1 2.9 2.7 16.8% 16.9% 3.5% 3.8% 1%

SYARIKAT TAKAFUL MALAYSIA 11.3 10.1 3.0 3.0 26.0% 25.9% 4.6% 5.4% 7%

SAMSUNG LIFE INSURANCE 19.8 18.0 0.9 0.9 4.9% 5.0% 1.5% 1.7% 11%

HANWHA LIFE INSURANCE 10.9 9.9 0.8 0.7 7.3% 7.3% 2.6% 2.9% 10%

DONGBU INSURANCE 8.3 7.2 1.1 1.0 14.7% 14.7% 2.4% 2.7% 16%

PRUDENTIAL PLC 13.8 12.4 3.0 2.6 22.7% 21.4% 2.7% 2.9% 13%

BANGKOK LIFE ASSURANCE 15.4 13.3 3.0 2.5 21.0% 20.9% 1.7% 1.9% 14%

COVER-MORE GROUP 21.4 19.5 3.2 3.1 14.9% 14.5% 1.6% 3.9% 10%

AVERAGE 15.8 14.3 2.1 1.9 14.6% 14.6% 2.7% 3.2% 7%

TUNE INSURANCE 18.0 15.5 3.3 3.0 18.4 19.1 1.7 1.9 17%

Source: Bloomberg, KAF

17

Superior ROEs and good trading liquidity – Although valuations are admittedly on the

high side, we believe they are supported by good value creation and healthy growth

prospects. Moreover, Tune Ins offers the best liquidity amongst insurance stocks listed in

Malaysia.

Valuing Tune Insurance

We have valued Tune Ins based on the Gordon growth valuation methodology, as we believe it

best captures value creation from the group’s aggressive medium-term growth plans. Using a

sustainable ROE of 19.7% based on FY16F, COE of 9.9% and a long-term growth rate of 6.5%,

we derive a fair PBV multiple of 3.95x for Tune Ins. Our 9.9% COE is similar to what we have

applied to LPI Capital (LPI MK, RM16.78, BUY), the other insurance player under our coverage.

Meanwhile, our 6.5% long-term growth rate assumption incorporates both organic growth as well

as the expansion plans of the group.

Multiplying the fair multiple with the estimated shareholders’ funds of RM441m as at end-FY14,

we obtain a fair equity value of RM1,740m for the group, which translates to a target price of

RM2.31. At fair value, the stock trades at 21.4x 2014F earnings declining to 18.5x next year.

Over the next six to 12 months, key events to look out for would be the potential acquisition of

local insurance partners in other core markets. This would allow Tune Ins to capture a bigger

underwriting share. Secondly, there are developments within the AirAsia Group which could

solidify Tune Ins’s business growth such as the targeted launch of AirAsia India in May, relaunch

of AirAsia Japan, as well as the commencement of operations by Indo AirAsia X and Thai AirAsia

X. Lastly, we believe strong earnings delivery supporting the company’s growth potential would be

another catalyst for the share price.

Chart 85 : Average traded value of listed Malaysian insurance players

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

Tune Insurance

Manulife Holdings

Pacific & Orient

Allianz Bhd

Syarikat Takaful

LPI Capital

2013 YTD 2014

Source: Bloomberg

Table 6 : Target price derivation

Sustainable ROE (%) 19.7%

Cost of equity (%) 9.9%

Long-term growth (%) 6.5%

Implied PBV (x) 3.95

Shareholders' funds (RM m) 441

Equity value (RM m) 1,740.1

No of shares (m) 751.8

Fair value per share (RM) 2.31

Source: KAF

18

Financial Statements

Income Statement

Year to December (RM m) 2012 2013E 2014F 2015F 2016F

Gross earned premium 215 368 429 488 558

Reinsurance (56) (127) (145) (162) (181)

Net earned premium 158 241 284 327 377

Investment income 12 22 31 35 41

Other income 14 32 37 41 46

Net claims incurred (44) (94) (109) (122) (138)

Commission expenses (37) (63) (75) (86) (100)

Management expenses (30) (58) (70) (82) (97)

Other expenses (5) (1) (1) (1) (1)

Finance costs (10) (2) (2) (2) (2)

Profit before tax 58 77 95 110 127

Tax expense (10) (4) (10) (11) (13)

Minority interests (7) (5) (5) (5) (5)

Net profit 41 68 81 94 109

Source: Company, KAF

Balance Sheet

Year to December (RM m) 2012 2013E 2014F 2015F 2016F

Property and equipment 13 14 14 14 14

Investments 474 535 630 725 836

Reinsurance assets 160 246 246 246 246

Insurance receivables 76 87 102 116 133

Other receivables 37 85 99 113 128

Intangibles 5 5 5 5 5

Investment property 3 3 3 3 3

Goodwill 24 24 24 24 24

Cash and bank balances 23 24 27 48 69

Total assets 816 1,023 1,151 1,294 1,459

Insurance contract liabilities 440 504 577 660 754

Deferred tax liabilities 3 2 2 2 2

Provision for taxation - 0 0 0 0

Borrowings 132 - - - -

Insurance payables 68 67 77 86 96

Retirement benefits 1 1 1 1 1

Other payables 31 52 52 52 52

Total liabilities 675 626 710 802 906

Share capital 61 75 75 75 75

Reserves 47 285 333 390 455

Minority interests 33 37 32 28 23

Total equity 141 397 441 492 553

Source: Company, KAF

Disclosure Appendix

Recommendation structureAbsolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capitalappreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%.Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpretedflexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months.Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight impliesupside/downside of 10% or more and Neutral implies less than 10% upside/downside.Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect thischange in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are notfully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value.

Analyst CertificationThe views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject security(ies) and subject company(ies); and no part of the compensation ofthe research analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

DisclaimerThis report has been prepared solely for the information of clients of Jefferies Group LLC and KAF Group of companies. It is meant for private circulation only, and shall not be reproduced,distributed or published either in part or otherwise without the prior written consent of Jefferies Group LLC and KAF-Seagroatt & Campbell Securities Sdn Bhd.The information and opinions contained in this report have been compiled and arrived at based on information obtained from sources believed to be reliable and made in good faith. Suchinformation has not been independently verified and no guarantee, representation or warranty, express or implied, is made by KAF-Seagroatt & Campbell Securities Sdn Bhd as to the accuracy,completeness or correctness of such information and opinion.Any recommendations referred to herein may involve significant risk and may not be suitable for all investors, who are expected to make their own investment decisions at their own risk. Descriptionsof any company or companies or their securities are not intended to be complete and this report is not, and should not, be construed as an offer, or a solicitation of an offer, to buy or sell anysecurities or any other financial instruments. KAF-Seagroatt & Campbell Securities Sdn Bhd, their Directors, Representatives or Officers may have positions or an interest in any of the securitiesor any other financial instruments mentioned in this report. All opinions are solely of the author, and subject to change without notice.

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