Spreading its wings in 2014
The key initiative in 2014 will still be the regional expansion of its travel insurance (TI) business through AirAsia and new tie-ups with other airlines. Locally, it will be focussing on transforming its non-life entity to enhance its underwriting margins.
We retain our DDM-based target price (cost of equity of 9.2%; long-term growth of 5%). Under our revised rating structure, our recommendation changes from Outperform to Add. The potential re-rating catalysts are (1) swift expansion in travel insurance, (2) EPS-accretive M&A in Indonesia, and (3) improving underwriting margins for the non-life business in Malaysia.
What is in store for 2014?
The key positive developments in 2014 will be – (1) increase in overseas contributions for the travel insurance business from existing and new markets (like India), (2) potential M&A in Thailand after completing the one in Indonesia, (3) increase in the contributions from its tie-up with Cebu Air, and (4) the sale of more non-life products through the Internet. Also, it is scouting for new tie-ups with other airlines. This will be a catalyst if it materialises as it will provide another avenue for revenue generation.
Projecting 16% earnings growth
Based on our forecasts, Tune will record a healthy net profit growth of 15.8% in FY14 on the back of a 10.1% rise in gross premium. The premium growth will be strong at a projected 18% for the travel insurance business compared to 8% for the non-life unit in Malaysia. Another driver will be the expected drop in claims ratio from 38.4% in FY13 to 36.2% in FY14 with the increase in the travel insurance component, which attracts a claims ratio of only circa 3%.
A niche player in travel insurance
We advise investors to accumulate Tune Ins as it is a niche player in the travel insurance segment, which offers good growth prospects and lucrative margins of 50%+. Its main strength is its tie-up with AirAsia, the leading low-cost carrier in Asia, which is not easily replicated.
Publish date: 10/12/13