• Stay BUY, new MYR4.30 TP from MYR3.90, 17% upside and c.5% FY24F yield. Syarikat Takaful Malaysia Keluarga posted a 24% YoY growth in PBT in 1H23, aided by impressive revenue growth from both the Family and General takaful arms, along with stabilising marked-to-market movements in investment securities. We continue to like STMB for its strong topline momentum, undemanding valuation, and position as the only listed pure takaful player in the domestic market.

• Group results review. STMB’s 2Q23 net earnings of MYR91.9m (+40% YoY, -2% QoQ) brought the 1H23 total to MYR185.5m, up 30% YoY. On a cumulative basis, 1H23 takaful revenue grew a strong 18% YoY on greater contributions from the Family and General takaful funds. Higher claims incurred and directly attributable expenses led to higher takaful service expenses (+24% YoY), though an absence of large fair value losses led to stronger investment return (doubled YoY), and consequently, stronger bottomline growth. No dividends were declared during the quarter.

• Family fund. 1H23 revenue surged 22% YoY, outpacing claims growth of 12% during the period. This was largely mitigated by greater amortisation of acquisition cash flows and wakalah fees (+55% YoY). The Family fund was also a beneficiary of stable fair value movements during the half-year (vs fair value loss of MYR67m in 1H22), leading to stronger investment return of MYR176m (more than doubled YoY). We also note the 7% YoY rise in the amount of contractual service margin (CSM) released to the P&L during the half-year.

• General fund. 1H23 revenue of MYR600m was up 25% YoY – management remains optimistic that double-digit revenue growth can be sustained in FY23 despite the record-breaking level achieved in FY22. Claims were well contained, growing 20% YoY, but the positive impact was cushioned by higher retakaful expenses (+28% YoY owing to more contributions received). Investment income posted a strong 53% YoY growth, indicating a healthy 7% yield for the General fund’s investments.

• Malaysia Financial Reporting Standards 17 (MFRS17) adjustments. 1H22 group net earnings of MYR143m under MFRS17 was a 9% downward adjustment from the MFRS4 level of MYR156.4m, against the guidance of 10-15% provided. By our estimates, 1H22 return on average equity (ROAE) post transition was 22%, compared to the MFRS4 level of c.17%. 1H23 ROAE, on the other hand, stood at 24% (MFRS17 only).

• No changes to our forecasts. Our TP is raised to MYR4.30 (from MYR3.90) after rolling forward our valuation year to FY24F. The TP includes a zero ESG premium or discount applied, as our ESG score of 3.0 for STMB is in line with the country median. At present, we have yet to publish our MFRS17 forecasts, but will do so in due time.

• Key downside risks to our call include weaker-than-expected takaful sales, higher-than-expected claims, and lower-than-expected investment returns.

Source: RHB Securities Research - 30 Aug 2023