Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with an unchanged fair value of RM4.80/share, pegging the stock to FY24F P/BV of 2.2x which is supported by ROE of 21.8%.

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

• Bank Rakyat (BR) has been a preferred bancatakaful partner of STMK since 2018. We gather that the 5-year bancatakaful deal with BR expired in July 2023. A new banca deal is currently being considered by BR and likely to be announced after an agreement has been reached.

• On a positive note, STMK has added a new preferred partner, Agrobank in Dec 2022 to distribute the takaful protection products to the bank’s customers. This will increase the number of preferred partners for bancatakaful to 7, which includes Bank Islam, RHB Islamic, Affin Islamic Bank, Bank Rakyat and Aeon Credit. The increase in preferred bancatakaful partners is envisaged to gradually raise contribution from Family Takaful business over a longer term.

• 64% of the gross contribution of STMK is derived from Family Takaful with the remaining 36% from General Takaful segment. Out of the 64% gross contribution from Family Takaful, >40% has been contributed from bancatakaful, 12% from Public Sector Home Financing Board (LPPSA) and 9% from employee benefit (EB) business.

• STMK remains the top player in LPPSA business despite the lower volume seen for mortgage financing under this segment recently.

• On bancatakul, the mix of contributions in terms of amount continues to be dominated by takaful coverage for mortgage financing. In contrast, by volume, gross contribution has been skewed towards takaful protection of personal financing (PF).

• As of now, gross contributions from the retail regular contribution takaful products remain insignificant at below 1% of the group’s total contributions.

• Recall, the adoption of MFRS 17 has seen the opening equity of the group on 1 Jan 2022 declining by 32% or RM598.3mil to RM1.24bil. This was attributed to RM1.1bil being carved out from retained earnings as unearned profit or contractual service margin (CSM). As at 31 Dec 2022, CSM grew by a commendable 19% or RM211mil to RM1.3bil. New CSM recognised was RM273mil while the release of existing CSM totalled RM213mil in 2022.

• MFRS 17 has no impact to the group’s capital ratios. This is in view that capital adequacy ratio is still based on existing risk-based capital (RBCT) framework.

• Recent trend saw a number of settlements and subsequent refinancing of PFs by bank borrowers. This in turn led to surrenders of takaful coverage and a retake up of protection based on new PFs of borrowers. This trend is seen positively favoring the group as it will accelerate the recognition of profit as part of takaful revenue.

• Under MFRS 17, upfront bancatakaful fees paid to partners for banca deal will no longer be recorded as intangible assets. Instead, the upfront fees and any acquisition expenses will be deferred and gradually amortised out as takaful expenses in P&L.

• We expect claims for motor and fire class of business in the near term to be elevated due to inflationary pressure on replacement parts as well as flood incidents affecting claims on fire policies. This will be in tandem with the trend on claims anticipated for the industry. The industry’s medical claims have continued to be seen trending upwards due to inflation. Nevertheless, for STMK, this impact is limited given that medical products only account for a small portion of Family Takaful’s total gross contribution.

• The stock trades a compelling FY24F P/BV of 1.6x, well below the 5-year historical average of 2.7x and offers a decent dividend yield of 4.8%.

Source: AmInvest Research - 20 Sept 2023