Tune Ins Holdings Berhad - Will cross-selling through AirAsia be as easy as it thinks?

14/3/2013 – Tune Ins Holdings recovered to just above its IPO price, after spending its first two weeks on the market in declines.

The insurance company that is 72%-owned by AirAsia chief Tony Fernandes and deputy CEO Dato' Kamarudin Bin Meranun was trading in Friday's session at RM1.39, above its reduced IPO price of RM1.35, and recovering from RM1.28 seen earlier in March.

It had planned to sell shares at RM1.55, but Tune Ins reduced the offer price to RM1.35.

By the time RHB Investment Bank ended its stabilising action to reduce share price volatility on February 26, it had mopped up a total 31.5 mln shares at a price of RM1.33 to RM1.35.

Mercury Research had earlier recommended SUBSCRIBE, with a target price of RM1.72.

The decline could be the result of general market weakness ahead of the General Election, expected to be called March 28.

However, it could also be due to the fact that the company listed at a Price/Book ratio of 3.9x, and a Price/Earnings multiple of 45x.

Or the fact that Tune Ins Holdings faces challenges ranging from the chequered past of its main operating asset, Tunes Insurance Malaysia Berhad (TIMB), to steep competition in growth markets such as Indonesia.

Incorporated in 2011 with 16 people, Tune Ins Holdings now has 1,000 agents and 15 branches, after buying Oriental Capital Assurance.

Its growth depends on AirAsia, which Fernandes and Kamarudin control.

In fact, the 600-page prospectus actually revolves more around AirAsia and the recently acquired 83.3% stake in TIMB.

The troubled history of Oriental Capital Assurance

Oriental Capital Assurance was a part of Maika, a loss making investment arm of the Malaysian Indian Congress (MIC).

Maika was set up in 1981 under the leadership of Datuk Seri S. Samy Vellu, who promised multiple returns for Indians, many of whom went into debt to pour in a total of RM108 mln.

It was eventually taken over by tycoon Tan Sri G. Gnanalingam and his G Team Resources.

In 2010, he bought out its 66,000 shareholders for a total of RM106 mln.

OCA was the shining light of the troubled investment company.

He then sold OCA to Tony Fernandes for RM146 mln, contentiously making a RM40 mln profit in just two years.

Question

1. What backlash could there be against TIMB over demands OCA profits should be shared with former Maika shareholders?

Ex-Maika shareholders believe that Maika itself could have listed OCA rather than selling it to Gnanalingam, and now they expect that Gnanalingam to distribute the profit to Indian-based charities, as they say he promised.

Question

2. Will cross-selling through AirAsia be as easy as it thinks?

Tune Ins uses the distribution channels of both AirAsia and the Tune Hotels, mainly their websites, to sell insurance to their customers during their booking process.

The group claims to have a huge database which will help them in cross-selling products and improve take-up rates.

Question

3. When will it buy an insurance company in Indonesia or Thailand?

Tune Ins readily admits it is in preliminary discussions with insurance companies in Indonesia and Thailand.

Tune Ins would find it difficult to grow its business if it does not succeed in buying insurance companies in those countries.

But it may not be that simple.

Question

4. How is Tune Ins in a better position than other insurance companies looking for M&As in Indonesia and Thailand?

The insurance market in Thailand and Indonesia is crowded with close to 70 and 90 companies respectively.

KSK Group, listed on Bursa, stands at around 30th and 50th position in Thailand and Indonesia.

It is looking to eventually become the top 10 general insurer in each country.

It is also currently on a lookout for M&A opportunities but has not identified any potential targets.

In any case, KSK has deep war chest of close to RM800 mln to fund a sizeable M&A.

Tune Ins only raised RM50 mln for strategic acquisitions.

Can it really compete with KSK's ambitions?

Further details can be found on page 55 of the prospectus.

FINANCIALS

The company just announced its FY12 results:

Revenue: +305.2% to RM226.4 mln
Profit: +52% to RM41.5 mln
Cash flow from operations: RM30.7 mln vs RM44.1 mln

Since the group didn't disclose its revenue breakup in its full year FY12 results, we have analysed M9 FY12 figures from the prospectus to get a better understanding.

This shows Tune Ins almost all its revenue from the online insurance business, before it bought TIMB.

But that contribution fell to 19.9% for the M9 FY12 as it also included revenue from TIMB’s general insurance business.

Malaysia is the biggest contributor with 82.3% to revenue, while Thailand and Indonesia contributed 6.7% and 4.3% respectively.

Tune Ins earlier earned net profit margins of 60%, but that fell to 11% for M9 FY12 after the acquisition.

Mercury Research thinks TIMB is a general insurance company with a lot of room for improvement.

In FY11, TIMB’s net profit margin stood at 9.96%, but it has seen some volatility as it registered a lower 6.61% in M9 FY12.

Although it has negatively affected profitability in FY12, Tune Ins believes the group will turn around its subsidiary by cutting costs and capturing additional revenues.

Question

5. Can Tune Ins turn TIMB around?

The analyst also says that group’s percentage of net claims to net earned premiums has been dropping since 2009.

This is a sign of improving risk management and having a better understanding of the market.

This is definitely one of driving factors behind its remarkable profit growth.

Question

6. How quickly will it climb to a double digit growth in profit margin?

After all, AirAsia is also not immune to competition.

It might face stiffer competition in Malaysia from new market entrant, Malindo Airways.

If more people book flights on competing airlines, they also won't be buying Tune Ins’ insurance.

Further details can be found on page 240 of the prospectus.

GROWTH DRIVERS

Tune Ins' key strength lies in exclusive relationship with AirAsia and Tune Hotels.

Tune Ins has managed to build a database of 7.6 mln policyholders, derived from policies underwritten via its online insurance software, TIPG since April 2011.

This database will help in cross-selling its insurance products and save cost of reaching prospective customers.

The acquisition of TIMB will allow Tune Ins to underwrite its Travel Protection Plan directly in Malaysia.

Hence, it will recognise the full amount of premiums paid by purchasers of Travel Protection Plan in Malaysia less the compulsory ceding of 2.5% to the national reinsurer, Malaysian Reinsurance Berhad.

The acquisition also allows underwriting of other general insurance products in Malaysia.

Airline growth prospects in Malaysia, Indonesia and Thailand

From 2009 to 2011, AirAsia is growing faster than the market.

In Malaysia, it has grown 15.4% even though passenger movement growth was only 12.7%, while in Thailand it has grown 17.2% versus 10.9% of passenger growth.

In Indonesia, it has grown 20.3%, versus market growth of 18.2%.

From Tune Ins’ perspective, it allows them to increase its revenues with minimal additional cost.

MANAGEMENT

Tune Money owns a direct stake of 55.6%, while AirAsia owns 16.2%.

These companies are in turn part-owned owned by Tan Sri Tony Fernandes and Dato' Kamarudin Bin Meranun.

Hence, both the promoters will indirectly hold a 72% stake in the group.

Tony Fernandes will be designated as non-Independent non-executive director.

Kamarudin will not be on the board but remains a substantial shareholder.

Further details can be found on page 66 of the prospectus.

KEY RISKS

Earnings dependent on AirAsia

Tune Ins' dependency on AirAsia has increased in the past three years as its Travel Protection Plan is offered to customers of AirAsia while they purchase tickets.

This plan contributed 66.9% of profit before taxation in FY09, 62.5% in FY10, 49.9% in FY11 and 81.1% in M9 FY12.

This should continue significantly in the future, but clearly business will be adversely affected by a decline in AirAsia customer volumes, or if AirAsia customers do not but the travel insurance plan.

It aims to extend its travel insurance business beyond AirAsia but it can't assure that it will be able to reduce its dependence on AirAsia.

In addition, it cannot provide travel insurance services to other airlines without obtaining AirAsia's approval.

Regulatory compliance

Before being taken over, TIMB had already received a rebuke from Bank Negara Malaysia (BNM).

BNM, in 2011, highlighted weakness in almost all of TIMB’s functional areas.

Expressing concerns about its motor and marine insurance business, BNM stipulated that its capital adequacy ratio should be maintained at 180%, even though the required regulatory capital adequacy ratio is only 130%.

TIMB currently meets the capital adequacy ratio of above 180%.

The impact of maintaining a higher ratio would mean that there may be times where TIMB needs to avoid writing certain risks or businesses that may have higher claims ratio but are still profitable.

It may have to avoid certain investments due to the different risk charges, which in turn may affect its future growth and profitability.

TIMB’s share of loss in the Malaysian Motor Insurance Pool

TIMB also has to bear the cost of the Malaysian Motor Insurance Pool – a high-risk insurance pool which all general insurance companies contribute to, including TIMB.

It seeks to provide motor insurance to vehicle owners who have difficulty obtaining motor insurance in the market.

The Malaysian Motor Insurance Pool made a loss before tax of RM166.3 mln for FY11 and RM126.2 mln for M9 FY12.

All general insurance companies have to bear an equal share of loss, irrespective of their market share in the industry.

Therefore, TIMB’s share of loss in the Malaysian Motor Insurance Pool for FY11 was RM12.2 mln and M9 FY12 is RM5 mln. That's about 10% of profit.

In FY11, TIMB registered a high share of loss as a result of FY10 and FY11.

The quarterly statements from the Malaysian Motor Insurance Pool are not received on a timely basis thereby resulting in an uneven impact on results.

So, TIMB has started recognising its share of the Malaysian Motor Insurance Pool on a best estimate basis to reduce the uncertainty of fluctuations if the statements are not received on a timely basis.

Going forward, TIMB will have to bear a larger proportion of loss in the Malaysian Motor Insurance Pool due to consolidation of general insurance companies.

But not just in Malaysia.

Question

7. How will it manage the regulatory compliance in Indonesia and Thailand?

All insurers in Thailand must participate in a risk-sharing disaster fund amounting to THB 50 bln (RM5 bln) to ensure sufficient cover for households and small businesses following flood.

Meanwhile in Indonesia, the regulator is looking to increase the industry's capital and solvency requirements with insurers having to raise their minimum capital to IDR100 bln (RM32 mln).

Question

8. How much risk does it foresee from low internet penetration rate in Indonesia?

AirAsia had difficulty in increasing its domestic market share over the past few years given the lack of a strong physical sales distribution network in Indonesia.

With the acquisition Batavia Air, AirAsia’s distribution channels in Indonesia will increase ten-fold to more than 5,000 authorized agents and more than 70 sales outlets.

This enlarged agency footprint will help AirAsia reach more customers.

This may also address the weakness in AirAsia’s strategy.

It is very reliant on internet-based ticketing system, but the Indonesian market is still very reliant on ticketing outlets.

That's because internet penetration is close to only 20%-25%.

While internet penetration is low will travel agents be willing to sell insurance products?

Question

9. Will it also increase premiums in Thailand, in line with competitors, due to recent flood?

Insurance companies in Thailand faced a sharp increase in premiums following the flood which may dampen sales in the near future.

Industry sources report that post-flood premiums have jumped more than 10%, compared to less than 1% increases before the flood.

Further details can be found on page 34 of the prospectus.

ONGOING LITIGATION

Tune Ins is party to several litigation and/or arbitration proceedings, particularly in relation to its motor insurance business and employment disputes, where the amount claimed in respect of each proceeding is less than RM3 mln.

TlMB had also commenced proceedings against a number of its former agents and employees, with aggregate claims totalling RM1 mln.

Further details can be found on page 532 of the prospectus.

DIVIDEND POLICY

Tune Ins targets for a payout ratio of 40% of profit in FY13 year

This translates into a dividend yield of 1.2%, based on FY11 data and the earlier IPO price of RM1.55.

Further details can be found on page 14 of the prospectus.

IPO PROCEEDS

RM 133 mln for repayment of bank borrowing
RM 27.2 mln for working capital
RM 50 mln for strategic investments
RM 12 mln for listing expenses

Further details can be found on page 28 of the prospectus.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

ISSUE DETAILS

Total Offer Size: 210.2 mln shares
Price per share: RM1.55/share
New shares: 143.4 mln shares
Vendor shares: 66.9 mln shares
Placement shares: 168.9 mln shares
Public shares: 41.4 mln shares

KEY FINANCIALS AT LISTING

Key financials at listing

Market cap: RM 1.2 bln
Price/Book: 3.9x
Price/Earnings: 45x

There are only four (4) reasons companies list:
1. Raise fresh capital for expansion. This is the most virtuous reason, because new shareholders can take part in the growth of the company.
2. Allow existing shareholders to (partially) exit. Frequently this means the best growth days of the company are behind it.
3. Change in laws and regulations. Such as when revised foreign ownership restrictions force existing shareholders to pare down their stakes, even though they might not want to do so. While this gives you the opportunity to buy into companies, you must ask yourself whether how the company is impacted by excessive regulation.
4. Raise the company's profile. New shareholders must ask themselves whether an ego-trip by existing shareholders is a good enough reason to buy into a stock.

"Sharing the growth" is frequently stated in the IPO's publicity material as the reason for listing, but that's just the marketing pitch.

The real reason is only ever one of the four stated above.

Download the prospectus here.

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