A few days ago, I briefly blogged on Tune Insurance, the tagline being "Good but pricey". Over the past few days, I have had more opportunity to delve deeper into the company's prospects. Despite my initial guarded-ness, I think the listing could be a most exciting new listing for first half of 2013.
From a team of 16 people at the start of 2011 to acquiring a general insurance company with approximately 1,000 agents and 15 branches throughout Malaysia. It is getting to the stage where AirAsia having achieved economies of scale in terms of passengers, they can now be a force in anything that is remotely linked to this captive group of growing passengers.
I mean if they could charge for seatbelt or going to toilet, that would be a listable concern on its own. As for insurance, its a captive crowd, those who do not sign up travel insurance should be labelled as "criminally stupid". Now think for a second, other forms of insurance requires a huge sales force, this is not only captive, growing, necessary and internet based... just a tick on the box. Money upfront.
Tune Insurance online insurance business comprises primarily of Travel Protection Plan and other online insurance products such as the AA Lifestyle Protection Plan and the Tune Hotels Lifestyle Protection Plan. Their online insurance business is now underpinned by exclusive long-term agreements with AirAsia. In addition they have entered into a contractual arrangement with Tune Hotels. They operate in 14 markets across 12 countries.
Tune Insurance will spend more than half of its proceeds to repay loans, 22.5% on strategic investments, 12.24% for working capital and the rest to pay listing expenses. Upon completion of the IPO, the market capitalisation of Tune Ins is expected to reach RM1.17 billion based on the indicative retail offer price of RM1.55. Tune Ins is also targeting a minimum dividend payout ratio of 40% of the company's net profit.
The key to the above paragraph, if you read into it: by paying down loans, it improves the net margins substantially, mind you their margins are already very rich (around 50%); on strategic investments, its basically to acquire another one or two small insurance outfits in Indonesia, Thailand and maybe the Philippines.
I like AirAsia as a fundamental driven stock, I still think AirAsia should notch at least a 50% capital appreciation within 1.5 years. As much as I like AirAsia, I think Tune Insurance is a better stock: there is assured growth for at least the next 3-5 years, deeper penetration into bigger growth markets in Indonesia, Thailand and the Philippines. Margins wise, how to beat Tune Insurance - usually when a business makes that kind of margins, there will sprout numerous competitors to eat at your market share and eventually drive down margins. However, in this case, the market is captive, unless you want to drag yourself to a few more steps in buying travel insurance from other brokers.
Tune Insurance is a better business model than AirAsia: just look at the capital requirements, largely a web based outfit with just some offices to latch onto other forms of insurance which may be correlated to the travelers such as foreign workers insurance, health insurance, etc. It rides on AirAsia's growth but without the accompanying growth in wages, FUEL/OIL hikes, buying and maintenance of planes!!!???
The first column is "Passenger Movements Market CAGR growth". The second is AirAsia's current market share. The third is AirAsia's market share CAGR. (CAGR=cumulative average growth rate).
Malaysia 12.7% 44.2% 15.4%
Thailand 10.9% 14.8% 17.2%
Indonesia 18.2% 3.7% 20.3%
Figure 1: Passenger Activity growth rates at major airports, 2009-2011.
As you can see, while AirAsia's market share is substantial in Malaysia, there is still a lot of room to capture more in Thailand and Indonesia. Judging from the track record, nobody in Asia, maybe even the world runs a better budget airline. You may not like Tony Fernandes as a person but you got to hand it to him, with or without favours. I believe Thailand and Indonesia will be huge hubs for AirAsia as the platform for AirAsia's business model will only work well provided there is ample workers and a relatively low wage base. Attempting to start a budget airline in a "medium to high wage cost" center is a recipe for disaster, or a candidate for AirAsia to come in and whack you.
Hence despite the rich valuations in terms of PER, I can see that they are listing Tune Insurance the moment they had the chance, and they could have waited till it got bigger. I may be mistaken in thinking there was substantial selling by promoters when in actual fact, its a relatively low figure.
Currently 80% of revenue is from online whiles claims amounted to just 3%. If you compare that to normal motor vehicle insurance, the claims are closer to 70%.
Pssst... Tony, free advice for you, ... you can further juice up Tune Insurance by going into "money transfers, wiring with outlets at all airports". This will cut out the inconvenience for a lot of travelers, esp foreign workers. Watch out Western Union.
I think Tune Insurance should be bought and held for 2-3 years at least, should hit RM2.80 by then with OK dividend yields to boot. For its listing this Wednesday, I think it will trade between RM1.50-RM1.72. This is the kind of stock that most long funds will want to buy and lock up, provided they get in at a decent price (which will in turn cap the downside) - got yield and capital appreciation plus growth and low risk, even though its business model is totally reliant on AirAsia.
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