MNRB Holdings Bhd (Nov 25, RM2.66)
Downgrade to underperform at RM2.86 with revised fair value of RM2.81 (RM3.40): MNRB’s 1HFY12 ending March net profit of RM37 million (-22% year-on-year [y-o-y]) was below our expectations, coming in at 28% of our full-year earnings forecast. The key variance to our forecast was the higher than expected 1H claims ratio for its reinsurance subsidiary, Malaysian Re of 65% (against our estimate of 60% for the full year).
The reason for the higher-than-expected claims ratio was due to provisions made in anticipation of the losses arising from the floods in Thailand. This resulted in MNRB’s claims ratio for 2QFY12 to be significantly higher y-o-y and quarter-on-quarter by 11 percentage points (ppt) and 13ppt respectively to 73%. This brought its 1HFY12 claims ratio to 65%. MNRB made a total provision of RM55 million for the expected losses, although we understand that MNRB is being conservative as the actual losses could be lower than the provisions. As such, there could be some writeback in the coming quarters.
However, given that the exact losses are still uncertain, we are increasing our claims ratio assumption for FY12 to 66% (from 60% previously) to be conservative. We are leaving our claims ratio assumption for FY13/FY14 unchanged at 60.5% per year.
The upside risks include: (i) stronger than expected premium growth; (ii) lower than expected jump in claims ratio; and (iii) mark-to-market gain on investments.
Our FY12 earnings forecast is reduced by 37.4% after increasing our claims ratio assumption for the year to 66% (from 60% previously).
We are now more cautious on MNRB’s earnings outlook given its increased claims ratio resulting from the expected losses from the Thailand floods. We had previously highlighted that MNRB’s international reinsurance treaties would have limited impact due to the capping of its losses, as was the case with the Japanese earthquake. However, it seems that even with the cap, the losses could still have a significant impact on MNRB’s earnings as indicated by the RM55 million provisions made (against Japanese earthquake of only about RM20 million). Unlike the losses arising from the Japanese earthquake, we believe MNRB’s exposure in Thailand is a lot more in volume. As such, we are wary that after further assessments of the losses in Thailand, MNRB might be further exposed to more losses in the coming quarters. We are therefore downgrading our call on the stock to “underperform” (from “market perform”) with a new fair value of RM2.81 (from RM3.40 previously) based on 0.6 times FY11 price-to-net tangible assets ratio. — RHB Research, Nov 25
This article appeared in The Edge Financial Daily, November 29, 2011.
Downgrade to underperform at RM2.86 with revised fair value of RM2.81 (RM3.40): MNRB’s 1HFY12 ending March net profit of RM37 million (-22% year-on-year [y-o-y]) was below our expectations, coming in at 28% of our full-year earnings forecast. The key variance to our forecast was the higher than expected 1H claims ratio for its reinsurance subsidiary, Malaysian Re of 65% (against our estimate of 60% for the full year).
The reason for the higher-than-expected claims ratio was due to provisions made in anticipation of the losses arising from the floods in Thailand. This resulted in MNRB’s claims ratio for 2QFY12 to be significantly higher y-o-y and quarter-on-quarter by 11 percentage points (ppt) and 13ppt respectively to 73%. This brought its 1HFY12 claims ratio to 65%. MNRB made a total provision of RM55 million for the expected losses, although we understand that MNRB is being conservative as the actual losses could be lower than the provisions. As such, there could be some writeback in the coming quarters.
However, given that the exact losses are still uncertain, we are increasing our claims ratio assumption for FY12 to 66% (from 60% previously) to be conservative. We are leaving our claims ratio assumption for FY13/FY14 unchanged at 60.5% per year.
The upside risks include: (i) stronger than expected premium growth; (ii) lower than expected jump in claims ratio; and (iii) mark-to-market gain on investments.
Our FY12 earnings forecast is reduced by 37.4% after increasing our claims ratio assumption for the year to 66% (from 60% previously).
We are now more cautious on MNRB’s earnings outlook given its increased claims ratio resulting from the expected losses from the Thailand floods. We had previously highlighted that MNRB’s international reinsurance treaties would have limited impact due to the capping of its losses, as was the case with the Japanese earthquake. However, it seems that even with the cap, the losses could still have a significant impact on MNRB’s earnings as indicated by the RM55 million provisions made (against Japanese earthquake of only about RM20 million). Unlike the losses arising from the Japanese earthquake, we believe MNRB’s exposure in Thailand is a lot more in volume. As such, we are wary that after further assessments of the losses in Thailand, MNRB might be further exposed to more losses in the coming quarters. We are therefore downgrading our call on the stock to “underperform” (from “market perform”) with a new fair value of RM2.81 (from RM3.40 previously) based on 0.6 times FY11 price-to-net tangible assets ratio. — RHB Research, Nov 25
This article appeared in The Edge Financial Daily, November 29, 2011.
