Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) but lower our fair value from RM6.20/share to RM4.70/share. Our valuation is now based on FY23 P/BV of 2.4x supported by ROE of 23.5%. We have reduced our FY23 earnings by 15.8% to factor in the impacts of FRS 17.

• We normally base our FV on FY22 numbers before rolling over valuation to FY23 after the end of 1QCY22. However, to be conservative, we have accelerated our valuation on STMK to be based on FY23 estimates which have incorporated the impacts of FRS 17.

• With the recent share price weakness, we see value emerging on the stock. Nevertheless, potential upside is seen narrower than before after taking into account the potential impacts of FRS 17.

• Based on our channel checks, FRS 17 which will replace FRS 4 is likely to be implemented on 1st Jan 2023. At this juncture, regulatory authority has yet to issue the finalized guidelines. Changes may still occur between now and the implementation date of the new accounting standard.

• The adoption of FRS 17 requires retrospective adjustment. Looking ahead, there will be a day 1 adjustment, impacting the opening balance of STMK’s shareholders’ funds in FY23. Unearned profits will be reversed out from its retained earnings. It will then be recognized under insurance contract liabilities in balance sheet.

• We see FRS 17 to be largely impacting STMK’s family takaful business. In 1H21, credit related contributions (MRTT including LPPSA MRTT and personal financing) made up a significant 75.2% of the total gross contributions for the group’s family takaful business. In view of the strong focus on bancatakaful products with single premiums collected upfront covering long term liabilities, FRS 17 will impact STMK’s recognition of revenue moving forward.

• From FY23 onwards, contributions will only be recognised by STMK when it is earned. This will prolong the recognition of revenue from the contributions collected. It will change from the current way of fully recognising contributions in P&L to a recognition on earned basis. As a result of this, unearned profit or contractual service margin (CSM) will gradually be amortised over the liability period of the insurance contract and recognised as insurance revenue in the P&L. This will coincide with the insurance services provided.

• For FRS 17, we expect both our earlier estimated FY23 shareholders’ funds and BVPS to be impacted by 28.5%. Meanwhile, FY23 profit after tax (PAT) and dividend per share is projected to be affected by -15.8% and -15.6% respectively. In regards to ROE, the impact is anticipated to be minimal as the denominator will be lower. This is due to the day 1 adjustment to the opening balance of shareholders’ funds in FY23 (see Exhibit 1).

• As of end 1H21, STMK retained its no.1 ranked position in family takaful business among 11 takaful operators with a commanding market share of 24.0%. Meanwhile, on a combined basis of 25 life operators in total (conventional: 14 and takaful: 11), it ranked 3rd with market share of 9.0%.

• In contrast for general takaful business, the group was ranked 2nd among 4 takaful operators with a market share of 23.0%. From a combined perspective of 25 general insurance operators (conventional: 21 and takaful: 4), STMK sits in the 11th spot with market share of 3.7%.

• Sales from online portal grew 19.0% YoY to RM48.3mil in 1H21 contributed largely by motor products followed by general non-motor and family takaful products.

• The group has recently rolled out a new usage-based motor takaful cover (Pay as you drive). This product is seen to be profitable as the policyholders tend to be lower mileage drivers with potentially low claims. Nevertheless, this product is seen to be intensely competed in the market with competitors offering similar coverage.

• STMK introduced its revamped ‘click for cover’ app with new look and features in Mar 2021. ‘Tele bantuan’ app was also launched at the same time to assist motor policy holders for tow truck assistance, panel workshops and windscreen services.

• To expand its digital reach, the group has been involved in social media engagements with campaigns done through Facebook, Instagram, Google Ads, Google Display Network and Youtube.

• STMK is also collaborating with LLPSA to cross sell new online accidental protection plans leveraging on the latter’s customer base.
   
• As at End of Sept 21, Foreign Shareholdings of STMK Stood at 8.21%.
   
• Our net profit estimates are based core or normalized earnings. The estimated impact to STMK’s FY22 reported earnings from the one-off imposition of “Cukai Makmur” (additional 9% tax to 33%) applied on profits in excess of RM100mil is a circa 8.4%.

Source: AmInvest Research - 5 Nov 2021