PP 7767/09/2010(025354)

Corporate Highlights
Malaysia
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
R esults/ B r iefing Not e Company No: 233327 -M

MARKET DATELINE
1 September 2010

Kurnia Asia Share Price : RM0.435

Fair Value : RM0.44
Below Expectations Recom : Market Perform
(Downgraded)

Table 1 : Investment Statistics (KURASIA; Code: 5097) Bloomberg: KUAB MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing DY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009(a)^ 1,149.9 86.2 2.9 -23.7 23.3 - 3.3 18.8 28.7 1.0 0.0
2010(f) 1,097.7 56.7 3.8 31.5 11.4 8.0 1.8 8.1 15.9 1.0 0.0
2011(f) 1,152.6 72.5 4.9 27.8 8.9 8.0 1.5 6.7 16.9 0.8 2.2
2012(f) 1,209.7 89.0 6.0 22.8 7.3 - 1.3 5.7 17.1 0.6 2.7
Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates
^ Numbers are annualised, FY12/09 consists of 6 months period due to change in FYE from June to Dec

♦ 1HFY12/10 results below expectations. 1HFY12/10 net profit of RHBRI Vs. Consensus
RM27.1m (-60.1% yoy) was below expectations, accounting for 27% and Above
In Line
23% of our and consensus full-year forecasts respectively. We believe the
Below
lower-than-expected earnings were mainly due to: 1) slower-than-expected
premium growth; 2) higher increase in unearned premium reserves; 3) Issued Capital (m shares) 1,500.0
higher management expense ratio; and 4) higher effective tax rate. Market Cap (RMm) 682.5
Daily Trading Vol (m shs) 2.4
♦ Better premium growth in 2Q, but still below our expectations. 52wk Price Range (RM) 0.44 – 0.805
Although Kurnia chalked up a strong 2Q gross premium growth of 9.6%, Major Shareholders: (%)
this was still not enough to offset the 1Q growth of only 4.4%. The Tan Sri Kua Sian Kooi 51.4
effective 1H gross premium growth of 4.1% was thus below our projected
FYE Dec FY10 FY11 FY12
8%. We believe Kurnia has been more selective in underwriting policies to
EPS chg (%) (42.8) (30.6) (23.7)
diversify its portfolio to more non-motor business (+8% yoy in 1HFY10). Var to Cons (%) (52.5) (38.8) -
We are thus reducing our premium growth forecasts to 5% for FY10 (from
8% previously) while maintaining our assumptions of 5% for FY11-12. PE Band Chart

♦ Higher unearned premium reserves (UPR). For the 1HFY12/10,

PER
PER
=
=
25x
20x
Kurnia’s UPR increased by RM36.8m, thus causing net earned premium to PER = 15x
PER = 10x
decline by as much. The UPR is an accounting recognition method which
recognises the premium earned throughout the duration of the policy. In a
growing gross premium environment, the UPR will increase as more money
will be allocated to the unearned premium reserve. We have thus adjusted
our ratio of NEP/NWP (Net Earned Premiums/Net Written Premiums) for
FY10-12 to 92% (from 106.5-107% previously). Relative Performance To FBM KLCI

♦ Management expense improved yoy but still higher than expected.

Kurnia Asia
1H underwriting surplus was further affected by higher-than-expected
management expenses in the 2Q of 23%, bringing 1H management
expense to 20.6%, (vs. our assumption of 17.5%). We note however that FBM KLCI
the ratio has improved by 2.3%-pts yoy from 23% in 1HFY09. The
improvement is positive as Kurnia targets to reduce its management
expense ratio to 15% (under the Target 15 project) within 2-3 years’ time.

♦ Risks: 1) Change in government policy that may result in lower car prices;
2) Jump in claims ratio; 3) Total expense ratio may exceed 100%; and 4)
Intense competition from insurance sector liberalisation.

♦ Forecasts. All in, our FY10-12 EPS forecasts are reduced by 24-43% p.a..

♦ Downgraded. After the earnings revision, we have cut our fair value to
RM0.44 (from RM0.63), based on unchanged target PER of 9x FY11 EPS.
Yap Huey Chiang
We thus downgrade our call on the stock to Market Perform (from (603) 92802641
outperform). yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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 Key Takeaways From The Briefing

♦ 1HFY12/10 results below expectations. Kurnia Asia’s 1HFY12/10 net profit of RM27.1m (-60.1% yoy) was
below expectations, accounting for 27% and 23% of our and consensus full-year forecasts respectively. We
believe that the lower-than-expected earnings were mainly due to: 1) slower-than-expected premium growth;
2) higher increase in unearned premium reserves; 3) higher management expense ratio; and 4) higher
effective tax rate.

♦ Better premium growth in 2Q, but still below our expectations. Although Kurnia chalked up a strong 2Q
gross premium growth of 9.6%, this was still not enough to offset the 1Q growth of only 4.4%. The effective
1H gross premium growth of 4.1% was thus below our projected 8%. We believe Kurnia has been more
selective in underwriting policies to diversify its portfolio to more non-motor business (+8% yoy in 1HFY10).
We are thus reducing our premium growth forecasts to 5% for FY10 (from 8% previously) while maintaining
our assumptions of 5% for FY11-12. Although it seems that the growth momentum has picked up in the 2Q, we
are skeptical that Kurnia would be able to continue growing its gross premiums at the same rate given: 1)
Kurnia will continue to be selective in its underwriting in the 2H; and 2) recent corporate exercises involving
insurance companies could create larger players with the means to intensify the competition for premiums in
the general insurance sector.

♦ Strong 2Q premium growth = higher increase in UPR. The Unearned Premium Reserve is an accounting
recognition method which recognises the premium earned throughout the duration of the policy. Thus,
premiums are only fully recognised a year after the policy was sold. For the 1HFY12/10, Kurnia’s UPR increased
by RM36.8m, thus causing Net Earned Premium to decline by as much. The reason why UPR has become an
issue now is because previously, it positively affected underwriting results due to the flattish growth of Kurnia’s
premiums (1HFY09 UPR growth was +RM38.7m). However, in a growing gross premium environment, the UPR
will increase as more money will be allocated to the unearned premium reserve. Although this is not
detrimental to Kurnia, it will still affect underwriting surplus for the accounting period. We have thus adjusted
our ratio of NEP/NWP (Net Earned Premiums/Net Written Premiums) for FY10-12 to 92% (from 106.5-107%
previously).

♦ Management expense improved yoy but still higher than expected. Kurnia’s 1H10 underwriting surplus
was further affected by higher-than-expected management expenses in the 2Q of 23%, bringing 1H
management expense to 20.6% (vs. our assumption of 17.5%). We note that the ratio has improved by 2.3%-
pts yoy from 23% in the 1H09, and Kurnia targets to reduce its management expense ratio to 15% (under the
Target 15 project) within 2-3 years’ time. However, we are taking a more cautious view, and increase our
projected management expense ratio assumption for FY10 to 21% (from 17.5% previously) i.e. in line with the
1H estimate. We also now expect the ratio to decrease gradually by 1%-pt p.a. in FY11-12. On two other
factors that affect underwriting surplus, i.e. claims ratio and commission ratio, 1HFY10 results show a claims
ratio of 67% and a commission ratio of 11%. We are leaving our claims ratio assumption unchanged but we are
increasing our commission ratio for FY11-12 to 11% (from 10% previously) to be in line with our FY10
assumption.

♦ Tax issue not yet resolved. Recall in our previous 12 May results note, we had already highlighted that
Kurnia’s effective tax rate is higher than the statutory tax rate due to the movement of funds from its
subsidiary, Kurnia Insurance Malaysia (KIMB), in order to pay for Kurnia’s RM400m loan from CIMB. This is
taxed as income. As a result, Kurnia’s 1HFY10 effective tax rate was at 34%. Moreover, in 1HFY09, Kurnia had
already utilised all its tax benefits provided by the losses it suffered in 2HFY08. As we had previously
mentioned, Kurnia plans to resolve the structural issues to improve its effective tax rate by the end of FY10.
Hence, we expect a more normal tax rate in FY11-12. We are thus increasing our tax rate assumption for FY10
to 35% (from 25%) and we maintain our FY11-12 tax rate assumptions at 25% p.a..

♦ Still negotiating for private placement. Kurnia’s recently-announced 10% private placement is still at the
discussion stage with the interested parties. We understand that Kurnia has a mandate to complete the
exercise within one year from the date of announcement. At the current price, we estimate the private
placement of 10% of the issued share capital would raise around RM77m. We understand that the placement
will be utilised to repay its RM400m loan to reduce its interest costs, while it is also planning to aggressively
expand its business. However, we believe the impact to earnings arising from the interest savings will be
minimal.

♦ Moving forward. Looking ahead, we believe Kurnia faces further challenges to grow its gross premium base
while keeping its claims ratio reasonable due to the increased competition arising from all the M&A activities
which have taken centre stage recently. However, its effort to reduce its exposure to the lumpy Third Party
Bodily Injury and Death (TPBID) claims is on track, as non-motor gross premiums grew by 8% yoy.

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 Furthermore, average premium per policy has also increased by 7.1% to RM322 (from RM321 previously)
indicating an improved underwriting selection policy.

Risks

♦ Risks to our view. The risks include: 1) change in government policy that may result in lower car prices; 2)
jump in claims ratio; 3) total expense ratio may exceed 100%; and 4) intense competition from insurance
sector liberalisation.

Forecasts And Assumptions

♦ Forecasts. All in, our FY10-12 EPS forecasts are reduced by 24- 43% after taking into account changes to: 1)
gross premium growth; 2) UPR reserve assumptions; 3) higher management expense ratio; and 4) higher
effective tax rate .

Valuations And Recommendation

♦ Downgrade to Market Perform. After the earnings revision, we have reduced our fair value to RM0.44 (from
RM0.63), based on unchanged target PER of 9x FY12/10 EPS. We downgrade our call on the stock to Market
Perform (from outperform) as we believe there are no compelling catalysts for the stock in the near term.
Despite the strong 2Q growth in premiums, we believe the 2H will be more challenging for Kurnia to grow its
premium base as it would still have to be selective in the business it underwrites, especially for motor as the
new TPBID scheme has yet to be announced or implemented.

Table 2. Summary of Quarterly Results

FYE Dec 4Q 1Q 2Q QoQ YoY 1H 1H YoY Comments
(RMm) FY6/09 FY12/10 FY12/10 (%) (%) FY12/09 FY12/10 (%)
Revenue 264.7 275.0 289.5 5.3 9.4 545.3 564.4 3.5 Driven by gross premium
growth of 4.1% and
investment income of
RM40.4m
Profit fr gen ins 36.0 40.3 12.2 (69.8) (66.2) 69.7 52.5 (24.6)
Others (11.4) (5.3) (6.2) 17.0 (45.7) (18.7) (11.5) (38.4)
Pretax profit 24.6 35.0 6.0 (82.9) (75.7) 51.0 41.0 (19.6)
Taxation 18.1 (11.2) (2.7) (75.6) (115.2) 18.0 (14.0) (177.6)
Tax rate (%) 73.6 (32.1) (45.9) 35.3 (34.1) Effective tax rate higher
than statutory tax rate due
to company structure
issues.
Net Profit 42.7 23.8 3.2 (86.4) (92.4) 69.0 27.0 (60.8) Net profit lower due to
unearned premium
reserves and higher tax
rate
Source: Company data, RHBRI estimates

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Table 3. General Insurance Quarterly Results
FYE Dec 4Q 1Q 2Q QoQ YoY 1H 1H YoY Comments
(RMm) FY6/09 FY12/10 FY12/10 %) (%) FY12/09 FY12/10 (%)
Gross 245.5 254.8 269.0 5.6 9.6 503.3 523.8 4.1 Driven by non-motor
Premium segment which grew
8% yoy
Reinsurance (33.8) (33.8) (26.8) (20.6) (20.7) (65.7) (60.5) (7.8)
Net premium 211.7 221.1 242.2 9.6 14.4 437.6 463.3 5.9
Unearned 23.9 (17.0) (19.8) 16.1 (182.7) 38.7 (36.8) (195.2) Negative as the
premium stronger 2Q yoy
growth provided an
increase in Unearned
Premium Reserve
Earned 235.6 204.0 222.5 9.0 (5.6) 476.3 426.5 (10.4)
Premium
Net claims (134.0) (134.9) (151.4) 12.3 13.0 (303.1) (286.3) (5.6)
Commissions (29.0) (21.2) (29.0) 36.4 (0.3) (51.3) (50.2) (2.2)
Management (64.3) (37.2) (50.8) 36.7 (20.9) (109.4) (88.0) (19.5)
expense
Underwriting 8.3 10.8 (8.7) (181.3) (205.5) 12.4 2.0 (83.8)
surplus
Investment 19.1 20.0 20.3 1.5 6.7 41.7 40.4 (3.3) Mainly reflecting
income interest and dividend
income.
Other income 8.6 9.5 0.6 (93.8) (93.2) 15.5 10.1 (34.8) Mainly reflecting
gain/loss from sale of
investments and MTM.
1H10 was lower as
KLCI was flattish yoy.
Interest exp 0.0 0.0 0.0 - - 0.0 0.0 -
Profit 36.0 40.3 12.2 (69.8) (66.2) 69.7 52.5 (24.6)
Key ratios
Reinsurance 13.8 13.2 10.0 13.0 11.6
Net claims 56.9 66.1 68.1 63.6 67.1 Claims ratio higher
yoy although within
expectations
Commissions 12.3 10.4 13.0 10.8 11.8
Management 27.3 18.2 22.8 23.0 20.6 Management expenses
expense improved yoy as a
result of cost cutting
Total expense 96.5 94.7 103.9 97.4 99.5 Thinner underwriting
surplus due to higher
claims ratio
Source: Company data, RHBRI estimates

Table 4: Earnings Forecasts Table 5: Forecasts Assumptions

FYE Dec (RM m) FY12/10F FY12/11F FY12/12F FYE Dec (RM m) FY12/10F FY12/11F FY12/12F
Turnover 1,097.7 1,152.6 1,209.7 Premium growth 5.0 5.0 5.0
Premium 995.3 1,045.0 1,097.3 Retention ratio 88.0 88.0 88.0
Invt inc fr Sfunds 92.5 97.6 102.4 NEP/GWP 80.1 80.1 80.1
Others 10.0 10.0 10.0 NEP/NWP 91.0 91.0 91.0
Claims ratio 67.0 67.0 66.5
Underwriting surplus 8.0 16.7 30.8 Commission ratio 11.0 11.0 11.0
Investment income 92.5 97.6 102.4 Mgmt exp ratio 21.0 20.0 19.0
Others (20.9) (24.3) (21.1) Total ratio 99.0 98.0 96.5
Invt return 5.0 5.0 5.0
Pretax 79.6 90.0 112.0 Source: RHBRI estimates
Tax (22.8) (17.5) (23.0)
Net 56.7 72.5 89.0
Source: Company, RHBRI estimates

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 IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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