Wednesday, February 20, 2013

Tune Insurance: Where does it swings?

I am amazed with the Malaysian market - at a time when some are afraid of Airasia's growth prospects due to competition from presumable Malindo, we are celebrating the high price valuation of Tune Insurance. (have you heard of Malindo news nowadays - is the March launch still on, BTW?)

Now, let me put this right. Airasia is offering a service which people would like to have - i.e. cheap travel. Tune Insurance which is an exclusive partner to Airasia is offering something which we can do insurance. Once in a while we may be afraid of the risks associated with flying, but if we are afraid, why fly? A travel insurance will not do much help except enriching the provider. Airasia as in other low costs airlines like Ryanair will push for these kind of services as they are fringe income from the Low-Costs airline business. But, overtime as I see it regulators will want these airlines to be much more upfront - such as the case of Australia summoning Airasia for misleading customers in its pricing.

No doubt I still very much like Airasia as I think it is going to be the leading contender in the low frills airline business in much parts of Asia, I think that Tune Insurance is overpriced. I am reading somewhere that at its current traded price of RM1.35 (market capitalisation of RM1.014 billion), the prospective PE for FY2013 is somewhere along 16x? Is it possible? Lets look at the Proforma Income Statement for the past 4 years. Firstly, lets look at the red block for Operating Revenue. Notice the growth in revenue and if you look at the Audited Report for 2009 to 2011, the travel insurance business has very high profit margin.

Proforma Income Statement for Tune Insurance
How not possible that it is not highly profitable in terms of margin? The marketing is all done by Airasia. A minimal fee and commission is probably paid to Airasia - that's all AND look at the gross claims paid. Nobody is claiming because there is not much you can claim from the coverage terms in the insurance anyway. Additionally, its costs is all in the commission and fees paid. If there's no sales, there's no commission to be paid. In fact, Tune Insurance has no costs literally speaking except for the "gwailo" CEO which it does not need - unless you need the slang when being interviewed by BFM.

That is why as you can see it, once the main business i.e. airline business is becoming successful - Tony and his team are reaping the benefits from this travel insurance business. I do not see how this insurance business is not profitable. It is a LPI (Lonpac) to Public Bank - a hugely successful bank in Malaysia. Lonpac does not do much marketing - Public Bank does most of the marketing. In fact, what's a potential loss to Airasia from its additional source of income from insurance will be a gain to Tune Insurance and can be vice versa, anytime. The CEO's job for the insurance company must be a good one!

Anyway, now that we know it is highly impossible that Tune Insurance will not be a hugely profitable business in terms of margin (unless there is a major plane crash - and even that I think it is covered), what about its growth and other potentials. The travel insurance will grow in tandem with Airasia's in Malaysia - probably slightly better growth due to the high inelasticity in its ability to price - who will notice if Tune is to add another RM1 or two?

But for its other side of business...Mid of last year Tune Insurance bought over a very small general insurance business despite the hugely competitive environment as there were several much bigger and more competitive insurance companies having their M&As over the last few years. That acquisition is what you see in the segmental revenue as below.

Segmental revenue
As you can see above, the revenue from travel insurance is being dwarfed by other general insurance business in 2012. This percentage will get bigger with the full year income being recognised. What about the impact? As much as the travel insurance business is highly profitable, the motor and non-motor insurance is NOT. It is a totally different business for Tune. It is highly competitive, highly regulated and highly not TUNE.

If it is pitching a different tune for the other general (motor and non-motor insurance), then I probably would buy it - something like they are going full-fledged online and selling it cheaper. The pitch as at now however is (not convincing for the price paid for) i.e. the "beautiful" low cost no frills airline (Airasia) and Tune Insurance is to be riding on the strength of that growth while it now has another side of business with 1,000 agents selling for the motor and non-motor general insurance. That does not go past me as P&O is only valued at less than RM400 million. How is Tune supposed to be worth more than RM1 billion.

Why did it acquire that insurance business anyway if it is not attractive in terms of prospects? It is cheap for one - with the money raised from the IPO, it has already covered the acquisition price. Tune needs to be a larger insurance company to survive despite the profits as there are minimal regulations requirements as a insurance company that it needs to meet. Another thing is that with the higher revenue - the income statement looks good. Who will pay for a company with RM1 billion valuation but its revenue is just a meager RM55 million?

Now back to the valuation again. The travel insurance is great but the other general insurance is not. For it to meet the 16x PE for this year as claimed in some newspapers, it all depends on how much can the Tune group swings the profits - and the list of directors in Tune Insurance are very much capable of that. That's why I am not interested.

No comments: