Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with a lower fair value of RM4.15/share from RM4.85/share. Our FY22/23/24 earnings have been reduced by 10.9%/10.7%/10.6% after factoring in a higher tax rate of 24% for the family takaful fund.

• We continue to peg the stock to an unchanged FY23 P/BV of 2.4x, supported by an ROE of 22% which has factored in the impact of FRS 17. No change to our 3-star ESG rating.

• On the recent flood incident, management alluded to setting aside expenses of RM750,000 in a risk fund for potential claims. With treaty reinsurance, the group was able to mitigate its net exposure to flood claims.

• The catastrophic event will increase the reinsurance cost by RM11.5mil of which 50% or RM5.8mil will be reflected at the takaful operator’s level. The higher expenses for flood claims and reinsurance costs have already been recognised in STMK’s FY21 financials. Hence, it will not be a drag on the group’s earnings in FY22.

• FRS 17 will be implemented on 1 Jan 2023. For year 1 adoption of the new accounting standard, the guided impact remains unchanged at 15–20% decline in PAT for FY23 compared to FY22.

• Meanwhile, on the day 1 retrospective adjustment, FRS 17 is likely to lower FY23F opening retained earnings by 30–45%. This will be higher than the earlier guided 20–30% decline as a result of the additional contributions from new policies underwritten by the group in the last 2 years.

• The potential drop in shareholders’ funds ahead will be contributed by the recognition of unearned profit (contractual service margin or CSM in short). CSM will be carved out from its retained earnings and recognised under insurance contract liabilities in STMK’s balance sheet.

• Despite the impact on PAT and shareholders, we project the ROE to rise at a faster rate by 22% in FY23F from 20.4% in FY22F while dividend payout ratio increases to 26.2% from 25.8%.

• Over the next 3 to 5 years, the group plans to gradually diversify from the concentration of its single contributions. It targets to grow more regular contributions from retail customers. This will be through leveraging direct/digital channels to sell affordable and simple protection life insurance plan.

• Digital sales from its various e-platforms (sales portal and mobile app) were circa 7% of the total GWC of its general takaful business.

• Effective in FY22F, wakalah fees or any other fees received by the shareholders’ fund in relation to the family takaful fund will be no longer be tax exempted. It will be taxed at a similar rate as the general takaful fund at 24%.

• A substantial portion of the group’s investment securities is classified as fair value through comprehensive income (FVOCI) securities. Any increase in interest rates will not adversely impact STMK’s earnings substantially. This is because the marked-to-market revaluation impact of the securities will flow through the comprehensive income. Recall in FY21, when the 10-year MGS yield increased by 93 basis points, the fair value drop in FVOCI securities was RM26.6mil.

• Phase 2 detariffication of motor and fire insurance has been delayed to 1 July 2022 from the end of 2021. We continue to see greater pressure on the pricing/rate for fire insurance moving forward compared to motor due to the latter’s already thin margins.

• We expect higher FY22F claims after the reopening of economy with the low motor claims ratio over the past 2 years normalising. The group plans to maintain a fire and motor mix of 50:50 for the general takaful business to mitigate the higher claims expected from motor insurance.

• Foreign shareholdings for STMK stood at 9.26% as at end-March 2022, a slight decline from 9.78% as of the end of Dec 2021.

• Notwithstanding our lower earnings forecasts, fundamentals of the stock remain intact with expectations of a gradual improvement to gross written contribution (GWC) growth, leveraged on improving credit growth outlook of financial institutions. STMK continues to be deeply under-valued, trading at more than 1 standard deviation below the average P/BV from Jan 18 to Apr 22 (Exhibit 1).

Source: AmInvest Research - 8 Apr 2022