Moving from DKSH to Tunepro and Ekovest

After reading the article on DKSH, I decided to reduce my position on DKSH. In the long run, DKSH is still a strong company and I believe its business model and positioning is very strong.  It will be the least impacted by the revolution in retailing that is happening now - at a very fast pace i.e. a lot of purchases are moving towards online. Just a note, I have made more than 20 transactions purchasing things online from buying shoes to padlock to fridge this year alone. That was from zero online purchase 2 years before.

That behaviour of mine is going to affect traditional retailing as I can really see the effects that Jack Ma and Jeff Bezos are impacting the traditional business lines.

Anyway, the reason why companies like DKSH may probably not be enjoying very good growth for this year is due to the prolonged impact of GST as well as weak Malaysian currencies. In fact, the blame on GST I think is not as correct, but most probably the weak Malaysian currencies as well as reduction of subsidies are really affecting many people on the streets. This as mentioned is going to affect DKSH who is distributing goods such as milk, cheese and pharmaceutical products.

On the other hand, I am putting my money on Tune Protect which has dropped from circa RM1.60 to now RM1.12. I am also putting more money into Ekovest.

The reason I am putting money into Tune Protect is because it is largely tied to how well Airasia's volume performance. IT IS TRUE that Tune Protect is affected by the ruling to bar automatic add-ons by Malaysian Aviation, however I felt that the price dropped is already compensated by that ruling.

The general thought is that with the barring of that automatic add-ons, it has affected Tune's revenue by some 35% - 40%. The below graph by Airasia in its slide presentation says that it has dropped by 39% on a per passenger contribution basis.

With that drop, Tune Protect's travel insurance business should hence start from this piece of situation. I believe that it is now growing in tandem with Airasia's passenger volume growth which is low double digit - from 2017 onward. In the long run, as long as the travel insurance business is tied to Airasia's growth - it should be above average.

Tune Protect is also building its other parts of insurance business i.e. motor, personal accident etc. The deregulation of the motor insurance rates may provide opportunities for Tune Protect to be more aggressive and winning market shares as its business model is less complex against the more traditional insurers whom have been around for a longer period.

Anyway, lets see as I purchase 8000 units of Tune Protect for this portfolio.

I have also added 5000 units of Ekovest as I feel that the impact of IWCITY - whom may not be bidding for the Bandar Malaysia will be minimal towards Ekovest. I felt that the drop in its price is an opportunity for me to add-on to the company - and this also follows my thoughts of having Airasia, WCE and Ekovest as my 3 main holdings.

One should note that the contract that Ekovest has is for the upmost long term - up to 50 to 60 years. As in any country, once a contract has commenced - it will be almost impossible to terminate them - be it there is a government change.

The case of IWCITY and Bandar Malaysia is different as it was not effective yet - although my initial propagation was that it was not going to be terminated.

Anyway, as I can see for Ekovest it is now completing half of DUKE 2 and has already commenced Setiawangsa-Pantai Expressway.

Those will be the main revenue generator for the group in the long term to come. I also do not think the market is putting any value towards its new projects such as River of Life and the proposed highway to Klang.

Tune Protect: Selling insurance direct

The Tune group has done it before and it can do it better this time with another product (see article below on Thestar by BNM's governor) - this time insurance. Earlier I have written about Tune Protect and its business. Many people may not realise that back in early 2000s when Airasia started, one of its bigger differentiation as against MAS and others is its direct delivery channel of selling air tickets. MAS and other airlines which had legacy delivery channel back then - i.e. through travel agents were not able to react as fast as Airasia which was a "new kid" then.

Now, the group has been selling its insurance products through the current internet channel and I see this as the way to go for the future and a winner - if executed correctly. Direct channel especially for those companies that do not have legacy issues (such as agents) - they would be able to do better. Traditionally, one of the biggest issues for insurance is its high costs of delivery or distribution. It can be overcome with a better delivery channel as long as the products are explained well. In today's world, information for these services as long as they are frank and accurate would do better than through agents.

Tune Protect I can see in fact do better if it works on making its products easy to understand. In Malaysia, there are 2 types of insurance licenses - life and general. Tune has the latter but it can still do certain type of products like Personal Accident, travel, medical and health besides the typical motor and fire insurance.

I expect a major change in this industry when Bank Negara allows price competition.

Tune Protect: The less volatile part of Airasia's business

Although I like Airasia - and still believe that it will grow more than average economic growth of the countries in Asian region, there is another company that may follow the growth of Airasia but has better cashflow. It is Tune Protect. I have in the past written an article on Tune Protect - then Tune Insurance. During then, I was not sure on the company as I was not able to imagine an insurance business which was newly formed but with such little claims.

I sincerely felt that it was quickly structured to go for IPO during then - still think that way and the pricing was not right. Of course at its latest traded price of RM1.57, it is ironically around the same IPO offer price (3-1/2 years ago) of RM1.55. Now, Tune Protect is a more mature insurance company and riding high with improved profitability over the 3 years period.

It has of course since moved on to offer several other products - including the motor, travel, medical and fire class insurance. The way I read its business strategy is it goes for small premium but highly profitable range of insurance products. The highest profitability is of course its travel insurance tagging along the sales of Airasia's tickets. Of course one has the option of not purchasing the insurance when buying flight tickets, but as more and more business travellers (especially) are opting for low costs tickets for short trips, I see travel insurance which is sold as an add-ons will continue to do well.

In the long run, I think Tune Protect will follow the growth trend of Airasia's revenue while it will continue to grow its other portfolio of insurance. Travel within the Asian region has been growing at much higher rate than GDP growth for the region - much due to China and India and as the percentage of middle income group is growing, it will still be a good growth number. Just look at the data here by Mastercard - many are markets for Airasia.

For investors who are concerned over Airasia's need for high capital expenditure due to plane replacements, one will not have that kind of concern over its insurance business. As a result of that, naturally Tune Protect may provide better dividends (as proven with 5 sen recent payment - see below) return than Airasia as its cashflow is much better. Further, its P&L numbers will also be more insulated from the fluctuations of currencies as opposed to Airasia.

Dividends for Tune Protect (last 3 years) has been strengthening
2014 - 3.86 sen / share
2015 - 4.04 sen / share
2016 - 5.00 sen / share

On its business segments which are not dependent on its travel segment (contribution from Airasia), I hope and think that the dynamism of Tune group will take opportunity of the internet landscape to grow its insurance business. I believe that the insurance industry has opportunity to change much just like where industries such as the transport (courtesy of Uber), air travelling (low costs airlines), finance (potential next wave of change), TV (or media, Netflix etc). My observation is that Tune Protect's products are sold differently as compared to the much traditional insurance companies.

At its current price of RM1.57 (RM1.18 billion market capitalisation), I am forecasting it to be trading at a good 10x PE as usually the best numbers will come in its 4th quarter where travel volume is the highest. With that multiple, it is definitely attractive especially for an above average growth business. Its PE Growth will be low (the lower the better and if any company with PEG of below 1, is considered very good) and with a good free cashflow, it is exciting.

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 without...travel 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.