STMB’s has share price appreciated 20% in two months driven by strong 1Q18 results and the perception that zero-rated GST will boost demand for its products. However, life insurance (65% of the group’s gross premium) is not subject to GST while most of its general insurance products are mandatory in nature. Downgrade to HOLD with an unchanged target price of RM4.35 (3.90x 2018F P/B, 25% ROE). The stock is trading close to +1SD above its mean P/B. Entry level: RM3.60.

WHAT’S NEW

• Strong stock price performance. Syarikat Takaful Malaysia’s (STMB) stock price has appreciated 20% over the past two months since we flagged in our late-Mar 18 report that the strong divergence in its share price performance vs stable fundamentals presented an excellent opportunity to accumulate the stock on weakness. We opine that STMB’s recent share price performance was driven by: a) strong set of 1Q18 results (8% above estimates), b) potential for lower medical claims expense with the switchback to SST regime from GST, c) perception of stronger insurance demand post zero-rated GST implementation, and d) lower risk of a share overhang from portfolio reshuffling within the sector with press reports alluding to potential delay in IPOs of a few large foreign insurers in Malaysia.
• Transition back to SST mildly positive. The new ruling government has kept its manifesto promise to switch back the sales and services tax (SST) system from the good and services tax (GST) regime. Management indicated that this would only be mildly positive for the group due to: a) lower GST input cost estimated at less than 1% on earnings, and b) lower medical claims expense. However, the impact on lower claims expense is unlikely to be significant as overall medical cost is unlikely to be reduced significantly, coupled with the fact that medical premiums only constituted 16% of group gross premiums.
• Unlikely to lead to significant boost in demand. The transition back to the SST may also result in lower overall pricing for non-life retail insurance products as they were not subjected to SST in the previous tax regime. Naturally, one would expect this to have a positive effect on demand. However, as motor and fire insurance, which are the two major general insurance products, are largely mandatory in nature, overall demand is unlikely to increase despite the implementation of zero-rated GST unless demand for residential property and passenger vehicles were to increase significantly. During the implementation of the GST on non-life insurance products back in 2015, premium growth for fire and motor was relatively stable while personal accident plans, which is more discretionary in nature, declined.

STOCK IMPACT

• Strong overall premium growth driven largely by motor premiums. The group’s relatively commendable gross premium growth of 7.6% in 1Q18 was largely driven by strong motor takaful premium growth of over 30% despite a 4.0% yoy contraction in industry motor sales volume over the same period. Online sales was a key driver with average sales rising from RM200,000/month when it was first launched in 2016 to RM2.2m/month currently. In 1Q18, online sales accounted for about 10% of the group’s motor insurance contributions. The group has set a monthly motor takaful contribution of RM5m to be achieved in the next 18 months, representing about 23% of total motor takaful contributions and 3% of total gross contribution.
• Family Takaful growth to register only a modest improvement in 2H18. The group’s Family Takaful division, which comprises 64% of the group’s gross premium base, reported flattish gross earned premium growth in 1Q18 due to weaker group medical premium and mortgage reducing term assurance (MRTA) sales. Contraction in medical premiums was a strategic decision to control rising claims expense with rising medical cost. That said, management indicated that recent restructuring of its distribution channels should lead to some form of improvement in MRTA premium growth in 2H18, which should translate into a mild single-digit improvement in overall Family Takaful growth vs 1Q18’s flattish trend.
• Over the longer term - Digital platform to gain more growth traction from a low base. Management expects its recently-launched online distribution platform (Click For Cover) to gain further growth traction driven by: a) additional new insurance products offered online (eg medical, term life, travel personal accident and critical illness plans) vs the current product offering of mainly motor and personal accident plans, and a) partnership with Lembaga Tabung Haji and Bank Islam Malaysia Bhd (major shareholders) by tapping on Lembaga Tabung Haji’s sizeable depositors base of 9.1m for the sale of insurance products online. This will help the group improve its direct distribution sales channels, which currently comprises a relatively small 20% and 16% of its General and Family business respectively, while improving overall cost efficiency by lowering overall agency commission cost. The group is targeting its online platform to deliver a gross premium growth of more than 20% going forward. As the platform was only rolled out last year, overall contribution to group’s gross premium for 2017 remains relatively low at less than 2%.

EARNINGS REVISION/RISK

No changes.

VALUATION/RECOMMENDATION

Downgrade to HOLD with unchanged target price of RM4.35 after share price has appreciated by 20% over the past two months. Dividend yield has also compressed from an attractive 4.8% to a less appealing 4.0% post share price run-up, while valuations are at +0.6SD and +0.7SD above its 10-year forward mean PE and P/B respectively. This coupled with modest 6% 2-year earnings CAGR prompts us to downgrade the stock to a HOLD from a BUY given its balanced risk to reward profile. We derive our target price by using a blended PE and P/B methodology as we do not have details on the group’s Life Insurance segment’s embedded value. In our blended PE and P/B valuation, we have ascribed a 14.0x 2018F PE in line with peer average and 4.46x 2018F P/B derived from our Gordon Growth-based valuation. (ROE: 25.1%, COE: 10.0%, Growth: 5.5%). Our target price implies a P/B of 3.90x and PE of 16.3x.

Source: UOB Kay Hian Research - 21 Jun 2018