salespeople misdealt: Syn Mun Kong Insurance

Tuesday, May 21, 2013

Syn Mun Kong Insurance - The Nation

Kasikorn Securities
May 20, 2013 11:46 am

Syn Mun Kong Insurance Plc (SMK)

Action and recommendation

- Maintain "Outperform" with a new 2013 fair value of Bt670.0/share. Our new fair value implies PERs of 11.2x, 10.9x and 10.3x in 2013-15, which makes SMK inexpensive and implies an attractive upside gain of 37.8percent from the latest closing price. Given its impressive 1Q13 results, we maintain our positive view on SMK and maintain it as our top pick among the three non-life insurance companies we cover. With many of the non-life insurance companies reporting surprisingly good 1Q13 results, we believe it will create a short-term trading catalyst and lead to a re-rating story for non-life insurance stocks, which are still undervalued.

Key investment points

- Impressive 1Q13 results. SMK reported impressive 1Q13 earnings of Bt256.8mn, up 56.9% YoY and 124.1% QoQ, and above our forecast by 53.6%. We attribute this strong growth to a large gain from the sale of securities (our upside risk) and interest and dividend income, which increased significantly by 102.1% YoY and 99.2% QoQ. Meanwhile, profit from the underwriting business was in line with our forecast, down a slight 17.1% YoY but up substantially by 978.9% QoQ. However, in 1Q13 SMK's loss ratio was still higher than the average level of 50.0%-55.0%, due to the large level of claims from commercial car insurance. SMK expects all these policies will expire within 3Q13. As a result, we expect its profitability will gradually improve, coinciding with the expiration of the commercial car insurance polices.

- Motor and miscellaneous insurance were still key drivers. In 1Q13, SMK's motor insurance premiums totaled Bt1,830.1mn, up a nice 17.7% YoY and 3.3% QoQ. Miscellaneous insurance also performed well, growing 17.3% YoY and 8.0%. This improvement was clearly supported by the significant increase in the number of cars in the system following robust car sales in 2012. However, as we have mentioned earlier, SMK normally focuses on the second-year insurance of a new car instead of the first year. We thus expect SMK's premium growth will accelerate from 2H13.

- 2013-15 earnings revised up by 25.2%, 10.6% and 8.4%. We revise up our 2013 earnings estimates by 25.2% to reflect the higher-than-expected 1Q13 net profit. However, we still maintain our conservative view on the gain from the sale of securities by leaving it as upside potential. We also raise our 2014-15 earnings forecasts by 10.6% and 8.4%, respectively. This markup is to reflect the gradual improvement (decrease) in its loss ratio as well as the higher-than-expected growth of miscellaneous insurance.

- 2013 fair value raised to Bt670.0. As a result of our earnings revision, our 2013 fair value rises to Bt670.0/share. Nevertheless, our new assumption does not include either the upside or downside risk from investment gains. Given the promising outlook for the insurance industry, the sector's remarkable operating performance as well as its inexpensive valuations, we maintain our bullish view on non-life insurers, with SMK our top pick.

Price catalysts

- Re-rating of non-life insurance stocks.

- Strong earnings growth in 2H13