3QFY09 adjusted net profit in line with estimate
* Hyundai Marine & Fire on Jan 29 reported 3QFY09 (fiscal year ends Mar 31) adjusted net profit of KRW68.1b, up 183% y-y and in line with our estimate. We attribute the increase to the firm’s expense ratio declining 7.9%pts y-y to 19.9% following a slowdown in long-term initial premium sales. However, the firm’s loss ratio and investment yield deteriorated 2.5%pts and 0.7%pts y-y, respectively, to 79.5% and 4.6%. One-offs included a KRW24.7b recovery of excess acquisition costs, a KRW5b tax payment, KRW4.9b equity-method loss at Hi-Car Direct, and a KRW1.9b loss from a write-off of foreign bonds. Meanwhile, premiums written grew 17.5% y-y to KRW1.7t on solid long-term line performances.
* Hyundai M&F’s funding costs have declined 0.16%pts to 4.76% since end-March
* Despite regulatory changes, the firm received over KRW10b in long-term initial premiums in 3QFY09 for a total of KRW32b ytd.
* Hyundai M&F’s capital adequacy improved to 203%.
* The firm’s auto loss ratio deteriorated 8.6%pts y-y to 78.7%. However, given a premium rate hike on Jan 1 and a likely decline in the accident rate, ratio should stabilize after 1H.
* The long-term risk loss ratio deteriorated to 89.2% in December following an increase in the number of small claims.
Maintaining BUY and target price
* We maintain BUY on Hyundai M&F and our six-month target price of KRW32,000(based on 1.5x FY08 P/EV). Shares have declined 20.8% over the past three months on rising auto-loss ratios and an unchanged policy rate slowing a rise in market yields. That said, we see limited downside and significant upside, believing that: 1) the firm’s bottom line will continue improving thanks to the recovery of excess acquisition costs; 2) Hyundai M&F’s long-term line will continue generating robust sales on last year’s rapid growth in initial premiums; and 3) the firm has entered a phase of high-earnings visibility with its invested assets reached KRW8.4t as of end-December. Shares are attractive in our view, trading at 6.1x FY10 P/E and 0.9x P/B--we expect ROE at the firm to average 17% over FY09-FY10.