Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with a revised fair value of RM3.80/share from RM4.15/share, pegging the stock to a lower FY23F P/BV of 2.2x supported by an ROE of 19.0%. No changes to our neutral 3- star ESG rating.

• We trim our FY22/23/24 earnings by 10%/15%/13% to factor in expectations of higher claims.

• STMK’s 6MFY22 earnings were slightly below our expectation, making up 43% of our full-year forecast. Meanwhile, it was within street numbers, accounting for 46% of consensus estimates. The variance to our estimate was due to higher-thanexpected net claims.

• 2QFY22 core net profit after tax declined by 16% QoQ to RM77mil due to lower net wakalah fee income.

• For 6MFY22, STMK recorded core net earnings of RM169mil, a decline of 7% YoY due to higher tax rate. Recall, effective from FY22F, wakalah fees or any other fees received by shareholders’ funds in relation to family takaful fund will no longer be tax exempted. It will be taxed similar to the general takaful fund at 24%.

• 6MFY22 PBT was higher by 8.8% YoY contributed by higher net wakalah fee income. The group recorded a commendable growth in gross written contribution (GWC) of 13.6% YoY. This was driven by higher sales from the family and general takaful business. GWC of family takaful business grew 11.7% YoY due to higher sales of credit-related leveraging on the financing growth of banks. Meanwhile, GWC of general business climbed 18.4% YoY supported by higher sales from the fire, motor and liability class of business.

• 6MFY22 saw an increase in net claims (+36.7% YoY). This was contributed by higher death claims for family takaful business. There were backlogged submissions by banks (bancassurrance partners) for claims on deceased borrowers in 2021 and payments were only settled in 6M2022. A high percentage of the deceased individuals were personal financing borrowers. 6MFY22 net claims arising from these backlogged submissions totalled RM122mil, largely occurring in 1QFY22 and slightly more than RM30mil in 2QFY22. 
  We understand that the backlogged claims have been fully settled in 6MFY22 and these will no longer be a drag on the group’s earnings in 2HFY22.
  Meanwhile, the increase in claims of the general takaful business was largely driven by conservative reserve provisioning in tandem with the growth of premiums for motor insurance. This was reflected by higher gross provisioning for incurred but not reported claims (IBNR) for the general takaful fund of 6.4% YoY in 6MFY22.
• The group recorded a lower underwriting margin of 18% for 6MFY22 due to higher net claims. Net claims ratio climbed to 52% for 6MFY22 vs. 42% in 6MFY21.
• Claims ratio for motor is anticipated to continue to normalise due to higher volume of traffic after the reopening of the economy. We gather that the retention ratio for motor insurance has remained at 47%.

• The group’s investment income increased by 9.3% YoY for 6MFY22. This was largely driven by higher profit income from fixed income investments for both family and general takaful businesses. The family takaful business recorded a fair value loss of RM68.5mil due to the weaker equity market performance in 6MFY22.

• The unallocated surplus funds for family was unchanged at RM1.3bil while that of general takaful business remained healthy at RM216mil.

• As at the end of June 2022, foreign shareholdings of STMK was slightly lower at 8.9% vs. 9.3% as of endMarch 2022.

• No dividends have been declared in 2QFY22.

• The stock is trading at a low 1.7x FY23F P/BV. Its valuation remains compelling with a superior ROE of 19% for FY23F.

• We continue to see an improving topline growth ahead, particularly on sales of credit-related products, leveraging stronger financing growth of banks in tandem with the economic recovery. Also, with the settlement of payments for backlogged death claims for bancassurance under the family takaful business, we see lower net claims in 2HFY22 vs. 1HFY22.

Source: AmInvest Research - 5 Aug 2022