Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with an unchanged fair value of RM4.15/share pegging the stock to FY23F P/BV of 2.4x supported by ROE of 22.0%. Our valuation reflects a neutral 3-star ESG rating.

• We make no changes to our earnings estimates following a briefing yesterday by the group chief executive officer, Nor Azman Zainal.

• The guidance for FRS 17 impact remains unchanged. For year 1 adoption of the new accounting standard, management continues to guide for a 15-20% decline in PAT for FY23 compared to FY22.

• Meanwhile, on the day 1 retrospective adjustment, FRS 17 is likely to lower the opening retained earnings of FY23 by 30-45%. 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.

• We have already factored in the FRS 17 impact into our earnings estimate.

• STMK continues to be ranked no. 1 in bancatakaful with a market share of 36%. The group aims to retain 17 bancatakaful partners (mainly financial institutions) for its credit related business.

• For bancatakaful, it will focus on retail business and increase the penetration of commercial banking customers.

• The group remains the market leader for Lembaga Pembiayaan Permuhaan Sektor Awam (LPPSA) business with a market share of 50%.

• Recall that contributions from employee benefits (EB) business made up 18-20% of the group’s revenue. Policies for EB business are required to be renewed yearly and pricing has continued to be competitive. Moving forward, the group plans to sustain its position as a major EB player in market. This will be by leveraging on its bank partners’ corporate clients as well as digital corporate partners to cross sell family products. Also, for EB business, STMK will be looking into potential business opportunities with cooperatives of corporate clients and enhance its services with digital solutions, wellness and lifestyle programs.

• The group targets to expand its general takaful and retail business. It targets to grow more regular contributions from retail customers through leveraging direct/digital channels to sell affordable and simple protection life insurance plan.

• We continue to like STMK for its undemanding valuation as the stock is currently trading at a low 1.7x FY23F P/BV. Its valuation remains compelling with a superior FY23F ROE of 22%.

• Fundamentals of the stock remain intact with healthy unallocated surplus funds totaling RM1.5bil (family takaful: RM1.3bil and general takaful business: RM223mil).

• STMK is looking at implementing a dividend reinvestment plan (DRP) towards the end of FY22. This will provide investors with the opportunity to gain additional returns by reinvesting their dividends into additional shares with the valuation on the stock continuing to be inexpensive.

Source: AmInvest Research - 17 Jun 2022