Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with unchanged fair value (FV) of RM4.70/share. We fine-tune our FY21/22 net profit by -6.3%/- 4.2% to account for lower top line and higher net claims assumptions. Nevertheless, our valuation remains unchanged as our FV is already based on FY23 numbers. We peg the stock to an unchanged FY23 P/BV of 2.4x, supported by an ROE of 23.8% which we have factored in the impacts of FRS 17.
• The stock is trading at a low 1.9x FY23 P/BV after the recent selldown post-completion of BIMB Holdings corporate restructuring. We see value emerging on the stock with its ROE still superior at 23.8% for FY23 even after penciling in the potential impacts of FRS 17. STMK is the 1st listed pure Islamic insurance company locally and continues to have a commanding market share in the family and general takaful business among takaful operators.
• 3Q21 net profit after tax slipped by 11.0% QoQ to RM73mil largely due to declines in gross written contributions (GWC) and higher net claims. GWC from family takaful business were lower QoQ attributed to weaker sales of credit-related products. This was in tandem with the slower pace of financing growth of banks impacted by lockdowns imposed following the outbreak of the new wave of Covid-19. On the flipside, the top line for its general takaful business was higher QoQ contributed by growth of motor insurance.
• 9M21 earnings decreased slightly by 1.5% YoY to RM255mil. Higher net claims, administration and management expenses offset an increase in GWC from both family and general takaful business.

• Cumulative earnings were below expectations accounting for 64.7% and 67.2% of our and consensus estimate respectively. The variance to our expectations was largely due to challenging sales, particularly for credit-related products attributed to Covid-19 lockdown measures. Nevertheless, with the subsequent easing of mobility restrictions and economic reopening, we expect Islamic financing to pick up in 4Q21. This in turn is expected to improve the growth of the group’s GWC.

• The group recorded an improved underwriting margin of 28.0% for 9M21 with a lower combined ratio of 72.0% largely on the back of lower claims and administration ratios. Net claims ratio was lower at 43.6% for 9M21. 9M21 saw lower medical claims YoY under the family takaful business. In contrast, net claims under the general takaful business were higher YoY contributed by the increase in claims from fire and motor.

• Family takaful’s growth in GWC grew 5.6% YoY while that of general takaful business expanded by 8.2% YoY for 9M21.

• 9M21 saw family takaful’s surplus attributable to takaful operator/participants climbed by 12.2% YoY largely due to higher net earned contributions (NEC). Meanwhile, the general takaful business’ surplus attributable to operator/participants was higher by 19.3% YoY for 9M21 boosted by better NEC and administration income.

• The group’s investment income was subdued for 9M21. This was largely due to the drop in profit income from fixed income investments for the family and general takaful business.

• The unallocated surplus funds for family and general takaful business remained healthy at RM1.23bil and RM225mil respectively.

• The group has recently rolled out a new usage-based motor takaful cover (pay as you drive).

• STMK introduced its revamped “Click for Cover” app with a new look and features in March 2021. Its “Tele Bantuan” app was also launched at the same time to assist motor policyholders 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 in Facebook, Instagram, Google Ads, Google Display Network and YouTube.

• STMK is also collaborating with LLPSA (Lembaga Pembiayaan Perumahan Sektor Awam) to cross-sell new online accidental protection plans leveraging the latter’s customer base.

• As at the end of September 2021, foreign shareholdings of STMK stood at 8.21%.

Source: AmInvest Research - 24 Nov 2021