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Saturday, 12 August 2017 | MYT 12:00 AM

Tune Protect losing appeal?

Poor earnings visibility dampens sentiment, sending stock to all-time low

Investor patience with Tune Protect Group Bhd seems to be wearing thin.

Having already been let down by the insurer’s weak financial performance in recent quarters, and now expecting the company’s underperformance to last a bit longer, investors have sent the company’s shares on a downward slope over the last three months.

From the year’s high of RM1.53 on May 22, Tune Protect shares have since lost about 34%.

The counter fell to an all-time low of 99 sen yesterday before rebounding to close at RM1.02, effectively wiping out RM383.4mil of the company’s market capitalisation in less than three months.

According to a fund manager, sentiment towards Tune Protect shares has been mainly weighed down by a lack of earnings visibility.

He notes many investors remain unconvinced that the earnings performance of the company, which specialises in travel and general insurance, could go back on track anytime soon – at least not this year.

“Some investors have lost patience (towards Tune Protect), especially in a market that has been rallying since the start of the year and where some other counters are performing well; so they are shifting their money elsewhere for better returns,” the fund manager, who works with a local bank, tells StarBizWeek.

“Earlier, investors had a lot of expectations that Tune Protect could recover quickly from the negative impact of regulatory change on its core travel insurance business, but that has not been the case ... the company’s results have been weak in the last two quarters, and the market now expects the weak results to last longer than initially expected,” he explains.

Tune Protect is scheduled to release its second quarter financial results in the coming Friday.

Recovery in sight?

Tune Protect’s bottom line has been hit since the implementation of the “opt-in” policy for all travel insurance by the Malaysian Aviation Commission (Mavcom) in August last year.

Under the ruling, consumers can to opt-in for services such as in-flight meals, additional luggage as well as travel insurance, as these services should not automatically be added on to your airfare.

The last two quarters saw the company’s earnings shrink as it continued to grapple with the adverse impact from the change the regulator brought about, which caused the take-up are in the group’s travel insurance to decline.

In the first quarter ended March 31, 2017, for instance, its net profit fell 47.2% to RM11.9mil, or 1.59 sen per share, from RM22.6mil, or 3.01 sen per share, in the previous corresponding period.

This was despite seeing some improvement in its group’s revenue at RM130mil, compared with RM129.5mil.

Besides the impact from Mavcom’s new ruling, Tune Protect’s earnings were also weighed down by higher claims and lower investment income.

At least one brokerage, that is, AffinHwang Capital, has earlier noted in its report that it expects Tune Protect’s net profit to bottom out in the second quarter, despite projecting a potentially better segment performance and lower claims from the general insurance segment.

Travel insurance is a major contributor to Tune Protect’s bottom line, accounting for about 70% of the group net earnings last year.

The sluggish sentiment aside, Tune Protect group chief executive officer Razman Hafidz Abu Zarim reiterates that the company’s travel business will recover in the second half of this year after having implemented various initiatives to address the decline in sales.

These include arranging with AirAsia to bundle travel insurance into the latter’s fair packages under Value Pack, Premium Flex and Premium Flatbed.

“We have launched our product bundling to all markets since early July 2017 for all AirAsia premium fares... we are expecting a recovery in the second half of 2017 leading into 2018,” Razman tells StarBizWeek in an email.

He notes that the full-quarter impact of the opt-in ruling on Tune Protect’s travel business from AirAsia is likely to have been reflected in the group’s earnings during the three months to March this year.

In addition, Razman says the group is also reviewing its motor franchise business to lower its average claims cost in the second half of the year.

Proxy to AirAsia’s growth

Tune Protect is majority-owned by AirAsia founder Tan Sri Tony Fernandes and his business partner Datuk Kamarudin Meranun. Collectively, they have a 29.42% stake in the company through their shareholdings in Tune Group Sdn Bhd and AirAsia Bhd.

Tune Protect, formerly known as Tune Ins Holdings Bhd, made its debut on the local stock market in early 2013 at an initial public offering (IPO) price of RM1.35.

When it was first listed, expectations were high that the counter would ride on the growth of its sister company AirAsia.

This is because Tune Protect has an exclusive partnership with the low-cost carrier that enables it to sell travel insurance to the latter’s passengers.

So, any increase in the number of passengers for the AirAsia should translate into higher sales of travel insurance for Tune Protect.

This, in turn, should lead to stronger earnings for Tune Protect, which has a dividend policy of paying out at least 40% of its consolidated profit.

Optimism towards the company’s prospects sent its stock on an upward trend a month after its IPO.

By August 2014, Tune Protect’s shares reached its record high closing of RM2.28.

Over the years, Tune Protect has taken steps to diversify its product offering in an effort to change market perception that it is just a travel insurance provider.

Even so, travel insurance remains very much the main growth driver of the company’s bottom line.

“We don’t see any new major catalyst for growth for Tune Protect, even though the company has taken the initiative to introduce new products (other than travel insurance) to the market,” an analyst with a local bank says.

“Travel insurance is still the ‘bread and butter’ of the company; even if the take-up rate of its other insurance products increase, we don’t expect that to contribute to significant improvement in group earnings,” he explains.

Razman concedes that travel insurance, particularly in business arising from AirAsia, will remain the growth driver of the company over the medium to longer term.

“Our travel insurance business stemming from the AirAsia tie-up continues to account for a sizeable contribution to our bottom line, but we will continue to expand our strategic partnership with other airlines to increase diversity and we are hopeful that we can announce a new partnership by this year,” Razman says.

Tune Protect has formed partnerships with several regional airlines, such as Cebu Pacific Air and Air Arabia, since 2013 in an attempt to diversify the earnings of its global travel division.

Razman notes the initiative is gradually yielding results, as evidenced by the decline in AirAsia travel premium contributions to 85% of the overall global travel premium in the first quarter of 2017, compared with 89% in the corresponding quarter last year.

As for the group’s traditional general insurance division - which offers motor, fire, marine, medical, personal accident and other miscellaneous coverage - Razman says, it will focus on growth in the retail space by leveraging on technology and analytics.

Meanwhile, a broker laments that there has been a lack of progress in Tune Protect’s mergers and acquisitions (M&A) trail in Indonesia, despite the many years of “talk”.

“The company has been talking about acquiring an Indonesian insurer, or forming a joint venture in the market, for several years now.

“But we have not seen anything coming out of it, so there is some disappointment there,” he says, noting that a solid presence in Indonesia would have improved Tune Protect’s margins.

According to Razman, Tune Protect is still actively pursuing a tie-up plan in Indonesia, but it is not an easy market to do so.

“The main challenge in pursuing M&A in Indonesia is identifying the right-fit target company – one that can meet most, if not all, of our criteria, and share our vision,” he explains.

“Any potential M&A has to take into account our travel market share there, new business growth potential, breakeven period, synergy with the target company and the cost of investment, including the capital injections required,” he adds.

While Indonesia, being the third-largest contributor to Tune Protect’s travel insurance business, is still in the plan, Razman points out that the group will also continue to work on expanding its business in existing markets.

“There really still are other growth areas to work on closer to home here in Malaysia and Thailand, where we already have our footprint,” he says.

Analysts’ take

Several analysts note the current low share price of Tune Protect is a good opportunity for investors to buy into a stock that has potential to grow in the medium to longer term.

“We continue to see the current headwinds as temporary, and expect the company to see better earnings from the latter part of this year to next year,” an analyst with a local brokerage says.

“What’s more, it is a dividend-paying stock with quite decent yields,” she adds.

Tune Protect declared a dividend payout of 5.2 sen per share for the financial year ended Dec 31, 2016, which translates into a dividend yield of about 5.1% at the current share price.

Such high dividend yield, driven by its share price decline, is unlikely to be sustainable.

Analysts’ projection is for Tune Protect’s dividend yield to stabilise at around 3% to 4% each year.

Of the eight analysts polled by Bloomberg, six have a “buy” recommendation on Tune Protect, while two have a “hold” call on the counter.

The 12-month median target price for Tune Protect at present stands at RM1.53, indicating an upside of about 50% from its last traded price.