Investment Highlights

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

• STMK’s 9MFY22 earnings were within expectations making up 76.4% of our forecast. Meanwhile, it was slightly above street numbers accounting for 83.5% of consensus estimates.

• For 9MFY22, STMK recorded underlying earnings of RM273mil, an increase of 7% YoY after stripping out the impact of Cukai Makmur. Stronger NEC was partially offset by fair value losses of RM64mil and higher net claims.

• Growth in gross written contribution (GWC) accelerated to 20.9.% YoY, supported by higher sales from the family and general takaful businesses. GWC of family takaful business picked up pace to register a higher growth rate of 22.2% YoY. The improvement was contributed by higher sales of credit related products (from mortgage and personal financing) 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 engineering classes of business.

• 3QFY22 core net profit after tax rose by 24% QoQ to RM100mil. This was contributed by a higher net earned contribution (NEC) and fair value gains of RM8mil compared to a loss of RM34mil in 2QFY22.

• In 3QFY22, the 3.8% QoQ increase in net claims were mainly contributed by the business as usual (BAU) reserving in tandem with the growth of premiums for both the family and general takaful businesses. We gathered that the reserving for potential claims was higher for motor comparatively to other insurance products due to the group’s claims experience. Nonetheless, claims has tapered from the high in 1Q22.

• 9MFY22 saw an increase in net claims by 32.7% YoY. The increase was largely contributed by backlog submissions by banks (bancassurrance partners) for claims on borrowers who deceased in 2021 but in which payments were only settled in 6M2022 under its family takaful business. A high percentage of the deceased individuals were personal financing borrowers. These claims arising from the backlogs submitted amounted to RM122mil in 6MFY22 of which the bulk occurred in 1QFY22 with slightly more than RM30mil in 2QFY22. 
  Meanwhile, net claims from general takaful business also increased as motor claims normalised from the reopening of economy.

• Retention ratio for 9MFY22 was sustained at 80.7%.

• The group recorded a lower underwriting margin of 23% for 9MFY22 largely due to higher net claims. Net claims ratio climbed to 48% for 9MFY22 vs. 44% in 9MFY21.

• The group’s investment income increased by 11.1% YoY for 9MFY22. 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 RM72.7mil due to the weaker equity market performance in 9MFY22 vs. a gain of RM9.8mil in 9MFY21.

• The unallocated surplus funds for family takaful were RM1.4bil while that of general takaful business remained healthy at RM207mil.

• As at end of September 22, foreign shareholdings of STMK remained stable at 8.9%.

• The stock is trading at a compelling FY23F P/BV of 2x (vs its 5-year mean of 3.0x) with a superior ROE of 19%. The group has achieved a stronger topline growth with improvement in sales of credit-related products and GWC growth of its general takaful business. Also, STMK’s claims are seen tapering after surging in 1QFY22 due to the backlog of death claims for bancassurance as well as surrender claims under the family takaful business.

Source: AmInvest Research - 2 Nov 2022