Investment Highlights

• We maintain BUY on Syarikat Takaful Malaysia Keluarga (STMK) with an unchanged fair value of RM4.80/share pegging the stock to FY24F P/BV of 2.2x, supported by ROE of 21.5%.

• No changes to our neutral 3-star ESG rating.

• Recall for 9M23, gross contribution for family takaful rose 3.1% YoY to RM1.64bil. The increase was driven largely by bancatakaful (credit-related coverage) which grew 2.7% YoY to RM1.3bil and medical takaful coverage (+7.9% YoY) to RM206mill. Gross contribution for medical segment comprised largely of contributions from employee benefits.

• By delivery channels, bancatakaful accounted for 67% of the group’s total gross contribution for family takaful. This is followed by direct channel (22%), brokers (4%) and agents (7%).

• The group continues to expand its regular contribution takaful products albeit still a small contribution to total family takaful contributions for now.

• On initiatives to launch Rahmah takaful products, STMK introduced an affordable, low-priced medical takaful coverage under its new digital platform, KAOTIM on 23 Nov. KAOTIM medical card offers coverage from as low as RM38 a month, cashless hospital admissions, cash allowances of RM100 per day at government hospitals and an annual limit of up to RM1.1mil with medibooster riders. We expect a good take up rate for the medical card in view that it is a no copay health coverage which provides financial savings in addition to the benefit of hassle-free healthcare protection to the insured.

• STMK remains ranked no. 1 in family takaful among 11 takaful operators with a market share of 26%. 3Q23 gross direct contribution for family takaful business increased 4% YoY, outperforming the industry which recorded a contraction of 8% YoY.

• The present outstanding contractual service margin (CSM) of RM1.3bil, supported by new business value of RM220mil, provides a healthy stock for future profits to be gradually recognised in profit & loss, consequently leading to a higher shareholders’ funds.

• 9M23 saw a decrease in earnings from the adoption of MFRS 17 compared to under MFRS 4, narrowing by 5.7%. Recall, management had guided earlier for the group’s FY23 net profit to decline by 10-15% due to the impact of MFRS 17. The gradual decrease in the impact of MFRS 17 on group earnings was contributed by the acceleration in profit recognition from takaful coverage on personal financing (PF). This follows the volume of early redemptions of PFs by bank borrowers and a retake-up of protection based on new PFs from financial institutions. Also, it was supported by new business growth.

• The group has secured new 5-year bancatakaful partnerships with Agrobank and Bank Muamalat. Besides, it has extended its bancatakaful partnership arrangements with Affin Islamic Bank and Bank Rakyat for another 5 years. Meanwhile, the 5-year bancatakaful arrangements with RHB Bank which commenced on 1 Aug 2020 will be expiring on 31 July 2025. The group aspires to protect the existing ones and increase the number of bancatakaful partnerships with banks. Besides, it will continue to embark on various automation and digitalisation initiatives to improve customer satisfaction, efficiency and generate cost savings. For LLPSA, STMK aims to retain its competitive edge, extensive distribution network and strong branding to support its market position as the 1st ranked player in this space with more than 60% market share.

• STMK is ranked 2nd in the market, behind Etiqa among 4 takaful operators for general takaful with a market share of 23%. Growth in gross direct contribution for general takaful of 22% YoY outpaced the industry’s 19% YoY in 3Q23. Agents remain the largest contributor to total general takaful contribution at 54%. Meanwhile, contribution from bancatakaful /direct channels accounted for 16%/15% of the group’s total general takaful contributions.

• Amongst the group’s initiatives on ESG, the group will be enhancing its product, Takaful My Solar Protection, to cover losses and damages to solar photovoltaic systems while donating 5% of contributions to an Orphan Fund under Sadaqa House. In addition, STMK will continue to invest in lower carbon emission investments to reduce its net portfolio carbon footprint exposure to sukuks of power producers. It will continue to increase exposure in satisfactory ESG-scored investments (sukuks and equity) as well as improve ESG scoring methodology for sukuk investments.

• STMK has a healthy capital adequacy ratio (CAR) exceeding the minimum regulatory requirement of 130% with healthy unallocated surplus for family and general takaful funds.

• The stock is trading at an attractive FY24F P/BV of 1.7x with a decent dividend yield of 4.5%.

Source: AmInvest Research - 26 Jan 2024