Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with revised fair value of RM4.85/share (previously: RM4.70/share). We fine-tune our FY22/23 net profit by 0.4%/1.8% after adjusting our estimates for investment income. We continue to peg the stock to an unchanged FY23 P/BV of 2.4x supported by an ROE of 22.7% after factoring in the impact of FRS 17.

• The stock is trading at a low 1.8x FY23 P/BV. Its valuation is compelling with a superior ROE of 22.7% for FY23.

• We continue to see improving topline growth ahead, particularly on sales of credit-related products, leveraging the stronger financing growth of banks in tandem with the economic recovery.

• 4Q21 core net profit after tax improved significantly by 55.7% QoQ to RM156mil largely due to higher gross written contributions (GWC) from general and family takaful business. Also, it was contributed by higher investment income and realised gains as well as lower tax expense. GWC from family takaful business rose QoQ attributed to the increase in sales of credit-related products. This was in tandem with banks’ faster pace of financing growth after the reopening of economy. The top line for the general takaful business was higher QoQ due to higher sales from the fire class. A differed tax benefit of RM43mil has been provided in 4Q21 due to the change in tax act on adjusted income for the family takaful business. Effective FY2022, wakalah fees or any other fees received by the shareholder's fund in relation to the family takaful fund will be no longer be tax exempted. It will be taxed similar to the general takaful fund.

• 12M21 underlying earnings rose 1.1% YoY to RM367mil supported largely by higher net earned contributions from both family and general takaful business.

• Cumulative core earnings, excluding the provision of deferred tax benefits, were within expectations, accounting for 99.5% and 102.5% of our and consensus estimate respectively.

• STMK recorded an improved underwriting margin of 30.3% for 12M21 with a lower combined ratio of 69.7%. Net claims ratio was lower at 42.3% for 12M21. 12M21 saw higher net claims under the general takaful business YoY contributed by the increase in claims from fire and motor. Meanwhile, net claims under the family takaful business were flattish.

• The overall group GWC grew by 8.4% YoY for 12M21. The increase was supported by sales of credit-related products under the family takaful business. Additionally, it was due to higher sales of the general takaful business driven by growth in premiums for motor, fire and engineering classes.

• Family takaful’s growth in GWC was 7.2% YoY while that of the general takaful business expanded by 10.9% YoY for 12M21.

• On the recent floods which occurred towards the end of 4Q21, the impact is manageable at circa RM8mil. This included the impact of the increase in claims and higher reinsurance cost.

• The group’s investment income increased marginally by 1.5% YoY for 12M21. This was largely driven by higher profit income from fixed income investments for the family takaful business which offset the lower investment income of the general takaful business.

• The unallocated surplus funds for the family and general takaful businesses rose to RM1.29bil and RM220mil respectively in 12M21 vs. RM1.09bil and RM209mil respectively in 12M20.

• As at the end of Dec 2021, foreign shareholdings of STMK stood at 9.78%.

Source: AmInvest Research - 25 Feb 2022