We  maintain  BUY  and  MYR2.40  FV  (22x  FY14F  EPS).  We  expect commendable FY13 results, as AirAsia Group reported strong growth in passenger  numbers.  While  near-term  share  price  may  remain  range-bound,  as  Thailand’s  tourism  industry  is  dampened  by  the country’s political unrest, we still like TIH’s fundamentals. We believe it stands to benefit from any potential recovery in the region’s tourism industry.

Seasonally  strong  quarter  for  travel  insurance.  We  expect  TIH  to report  4Q13  online  and  reinsurance  premiums  of  >MYR25m  (3Q13: MYR26m),  assuming  a  26-32%  take-up  rate.  AirAsia  Group  (AIRA  MK, BUY, FV: MYR3.70) posted 28% y-o-y passenger growth, with: i) AirAsia Indonesia (34%), ii) AirAsia Thailand (26%), iii) AirAsia Malaysia (11%), and  iv)  AirAsia  Zest  (615%).  AirAsia  X  (AAX  MK,  BUY,  FV:  MYR1.31) saw 22% growth over the same period. The management guided that 4Q is typically a stronger quarter for travel insurance.

Near-term  risks. We  believe  TIH  may  remain  range-bound  in  the  near term,  as  investors  priced  in  the  risk  of  weaker-than-expected  1H14 numbers  due  to  the  tourism  slump  caused  by  the  prolonged  political deadlock  in  Thailand.  Based on  media  coverage,  the  Tourism  Authority of  Thailand  reported  lower  tourist  bookings  by  foreigners  (due  to  travel warnings and rescheduled flights), as well as lower tourism contribution from  Thai  nationals  who  took  time  off  to  participate  in  demonstrations. Thailand  is  a  significant  market  as  it  contributed  20% of TIH’s travel insurance. TIH’s share price has retraced by 10% since end-Nov 2013.

Outlook remains bright. Nevertheless, we believe TIH offers  attractive propositions at current levels. TIH is still in a growth phase as it expands into  new  markets  beyond  Asean  in  efforts  to  become  a  global  insurer. We  expect  the  company  to  secure  more  tie-ups  with  airlines  and  travel providers.  TIH  is  also  expected  to  ride  on  the  additional  customer  base through the growth of its current airline partners, AIRA and Cebu Pacific. Also, based on  our  observation,  Thailand’s tourism numbers historically rebounded  quickly  following  major  events  like  tsunami,  pandemic outbreaks and riots. This suggests that TIH could benefit from a potential recovery in Thailand’s tourism industry in the longer term.

Maintain  BUY  and  MYR2.40  FV,  pegged  to  a  22x  FY14  P/E.  Our forecasts  are  unchanged  at  this  juncture  as  we  believe  the  long-term picture outweighs its near-term risks. Another risk  to our valuations is a worse-than-expected claims ratio in its travel insurance business. So far, this is mitigated by AIRA’s consistently high operating efficiency.

Figure 1: AirAsia Group’s and Cebu Pacific’s international flights (quarterly passenger numbers)

Thailand’s  tourism  industry  relatively  robust.  Based on Figure 2, Thailand’s foreign  tourist  arrivals  demonstrated  a  quick  recovery  process  after  major  events  in the  past  like  pandemic  outbreaks,  tsunamis  and  political  riots.  The  current  political situation in Thailand, which directly affects TIH’s travel insurance business, may be a reason for TIH’s range-bound share price in the near  term. The political unrest  may be  prolonged,  potentially  dealing  a  blow  to  the  tourism  sector  even  during  the Songkran festivals in April. However, we do not see this as a significant risk to TIH’s long-term prospects. We believe TIH could benefit from any potential recovery in the region’s tourism industry over the longer term.

Contributions from Malaysia continues to decline, in line with the company’s regional expansion strategy

Financial Exhibits

We believe TIH's topline growth will continue to be driven by the strong latent potential of online premiums. We believe that its TIMB subsidiary's revenue growth is not likely to pick up yet, as management is more focused on boosting its bottomline

We expect TIH’s claims ratio to be better than the industry’s, as we project an increase in the proportion of low claims online travel insurance premiums vs total premiums. Historically, its online claims ratio stands at 3.6%

Financial Exhibits

 TIH's repayment of MYR133m in borrowings (for the business expansion via TIMB) is expected to result in zero gearing

SWOT Analysis

Re-rating catalysts:

- Higher-than-expected take-up rate in the online business 
- Better-than-expected improvement in general insurance (GI) claims ratio 
- Higher-than-expected growth in GI premiums, with controlled levels of expenses and claims 
- Potential acquisition opportunities  
- New customer segment  
- Tune Insurance Malaysia (TIMB) posting better-than-expected profitability

Company Profile

Tune  Insurance  Holdings  (TIH),  an  investment  holding  company,  is  engaged  in  the  provision  of  various  general  and  life  insurance products  in  the  Asia-Pacific  region.  The  company  offers  a  range  of  online  products,  including  travel,  lifestyle  protection,  and  guest personal accident insurance.

Recommendation Chart

Source: RHB