Investment Highlights

• We downgrade our call on Syarikat Takaful Malaysia Keluarga (STMK) to HOLD from BUY with a lower fair value of RM3.60/share from RM3.80/share previously pegging the stock to FY23F P/BV of 2.2x supported by a ROE of 18.8%. This follows a lower BV/share estimate after trimming our FY23F earnings by 3.3% to factor in higher management expenses.

• No changes to our neutral 3-star ESG rating.

• STMK’s 12MFY22 earnings were within our expectation, coming in almost on the dot of our forecast. Meanwhile, it was ahead of consensus, 7.3% above street estimates.

• In 12MFY22, STMK reported underlying earnings of RM356mil, a decline of 3% YoY after stripping out the impact of Cukai Makmur. The lower earnings were attributable to fair value losses on investments and an increase in net claims coupled with higher admin and management expenses, which more than offset an increase in NEC.

• Growth in gross written contribution (GWC) remained strong at 19.1% YoY, supported by higher sales from the family and general takaful businesses. GWC growth of family takaful business tapered to 16.6% YoY from 22.2% YoY in the preceding quarter. The growth was supported by sales of credit-related products. Meanwhile, GWC of general business improved to 24.7% YoY, driven by higher sales from the fire and motor classes of business.

• 4QFY22 core net profit after tax declined by 12.7% QoQ to RM85mil. This was contributed by lower net earned contribution (NEC) together with higher net claims and expense reserving.

• In 4QFY22, the overall net claims for the group remained elevated. This has resulted in a claims ratio of 45.8% in the quarter. Net claims for the family takaful business increased by 6% QoQ due to higher medical claims and disability. Meanwhile, claims for general takaful business declined by 10% QoQ, owing to lower claims from liability and contractors of all risk and engineering class of business.

• 12MFY22 saw an increase in net claims by 28.6% YoY. The increase was largely contributed by higher medical claims and surrender under family takaful. Also, it was contributed by higher claims from the fire, motor and personal accident class of business under general takaful. For FY23F, we expect claims to continue to be elevated due to medical inflation.

• Retention ratio for 12MFY22 was slightly lower at 80.2%. We expect the cost for retakaful to be higher in FY23F than FY22. This is expected to slightly impact the insurance service results at group level with the group adopting FRS 17 effective from 1 Jan 2023.

• The group recorded a lower 12MFY22 underwriting margin of 23.7% largely due to higher net claims. Net claims ratio climbed to 47.5% for 12MFY22 vs. 42.3% in 12MFY21.

• The group’s investment income increased by 13.1% YoY for 12MFY22. 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 RM56mil due to the weaker equity market performance in 12MFY22 vs. a gain of RM17.8mil in 12MFY21.

• The unallocated surplus funds for family takaful were RM1.3bil while that of general takaful business remained healthy at RM205mil.

• As at end of Dec 22, foreign shareholdings of STMK increased slightly to 9.4% from 8.9% in Sep 22.

• STMK declared a dividend of 13.5 sen/share (payout: 31.8% based on core EPS) in Dec 2022 which was subsequently paid out on 16 Jan 2023. This was higher than 12 sen/share in FY21.

• The stock is trading at a fair FY23F P/BV of 2.2x with a balanced risk and reward. With a total return of less than 15%, we see limited near term upside on the stock.

Source: AmInvest Research - 27 Feb 2023