STMB reported 2Q18 results that were in line with expectations. The stronger-thanexpected premium growth was offset by a higher-than-expected claims ratio and weaker investment income due to increased volatility in capital markets. Maintain HOLD with an unchanged target price of RM4.35 (3.9x 2018F P/B, 25.1% ROE). The stock is trading close to +1SD above its mean P/B. Entry level: RM3.60.

RESULTS

2Q18 results in line. Syarikat Takaful (STMB) reported a 2Q18 net profit of RM50.4m (+11.9% yoy and -27.9% qoq). 2Q18 earnings growth of 11.9% yoy was fueled by a commendable 15.9% yoy growth in net earned contribution but partly offset by lower net investment income due to higher marked-to-market losses given the recent volatility in capital markets. On a qoq comparison, as expected, earnings declined by a sharp 27.9% qoq on the back of a spike in the surplus profit transfer to participant funds (from RM1.5m in 1Q18 to RM51.5m in 2Q18) mainly due to a time lag effect. As such, we deem the 1H18 results to be in line despite it representing 55.2% of our full-year estimate; we expect a slightly weaker 2H18.

STOCK IMPACT

Strong overall premiums growth driven largely by motor premiums. STMB reported strong 15.9% yoy net premiums growth, driven largely by 33.1% yoy growth in general takaful net premium growth and in particular, motor premiums growth (+30% yoy growth). Online sales accounted for about 10% of the group’s motor insurance contributions. The group has set a monthly motor takaful contribution target of RM5m to be achieved in the next 18 months, representing about 23% of total motor takaful contributions. The strong growth in motor premiums has however, raised overall claims ratio in the general takaful division from 45.5% in 2Q17 to 57.9% in 2Q18, given motor takaful’s inherently higher claims ratio vs that of fire takaful. Family takaful recorded a commendable 11.4% net premium growth, driven largely by credit-related products.

Strong premiums growth offset by higher-than-expected claims and lower investment income. The group’s 1H18 net premium growth of 11.1% continues to track above our more conservative 6.0% growth forecast. However, this strong growth has come at the expense of a slight deterioration in underwriting margins which is trending at a lower 8.5% vs our forecasted 9.7% due to higher claims. In addition, the weak capital markets had also impacted its investment income and in turn, diluted the positive benefits of the strong premium growth on earnings.

Transition back to SST mildly positive… The new ruling government has kept its manifesto promise to switch back to 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.

…but unlikely to lead to a 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, premiums growth for fire and motor was relatively stable while personal accident plans, which is more discretionary in nature, saw a decline.

EARNINGS REVISION/RISK

No changes as strong premium growth was offset by lower-than-expected underwriting margins.

VALUATION/RECOMMENDATION

Maintain HOLD with an unchanged target price of RM4.35. The stock price performance has been capped at a narrow range since our recommendation to downgrade to a HOLD a month back. 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. 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 valuations, we have ascribed 14.0x 2018F PE, in-line with the peer average, and 4.46x 2018F P/B which is 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 - 30 Jul 2018