Takaful : BUY CALL (OSK)

We view the recent selldown in Syarikat Takaful's (STMB) shares as merely a correction. Its still compelling valuations indicate a strong buying opportunity at the current price. We foresee better-than-expected 3Q results, which will likely be announced on 21-22 Nov. Maintain BUY on STMB with its net profit forecasts raised, given the strong upside in Wakalah income following the full adoption of the Wakalah model. Our FV of RM8.00 is pegged to 12x FY13 EPS, implying a 62.6% upside. With another 15-20 sen dividend expected to be announced, we arrive at an annualized dividend yield of 6%-7% based on the current share price.

Fundamentals still intact. Having spoken to management recently, we have been reaffirmed that STMB's valuations are still intact as: i) claims experience is expected to remain healthy for the foreseeable financial quarters, ii) management does not expect a hike in management expenses for FY12 and FY13, and iii) the company does not expect additional extraordinary items save for the one-off release of unearned contribution reserves arising from the change in reserving estimates for the Group's Family Takaful products, general takaful and expense reserve, which had a total profit impact of RM4.7m at the shareholder level YTD.

2H results may surprise on the upside. We expect 3Q results to be announced around 21 Nov. We believe results for the remaining quarters may exceed expectations on the back of: i) Wakalah income upside from General Takaful fund, and ii) anticipation of a favourable tax rate of about 20% for this financial year due to non-taxable underwriting surplus transfer from the Family Takaful fund.

Buying opportunity. STMB's share price shed 30% of its value recently on lack of support due to the stake sell-downs by BIMB Holdings and EPF. We understand that the selling pressure has since eased. Given that the company's valuations remain compelling, we advise investors to take advantage of the price correction, which had resulted in a 62.6% upside to our FV.

Conservative adjustments to forecasts. We have adjusted our net profit forecasts upwards by 9.4% and 2.6% for FY12 and FY13 respectively. However we remain conservative as the upside in Wakalah fee income can be defrayed into commissions and management expenses, as well as upside risks in claims experience for general takaful segment for FY13. We believe the company may still exceed our forecasts.

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Well, if one is to read the above reports, fair-value at RM8 ... wow. With good dividend yields, why not? The sell-down is overdone ... or there will be still yet another sell-down? Buying at RM5 is risk and cheap, how about if it dives to RM4 ... will you buy more and keep till RM8? Wait ... we should not buy into the stories of broker-reports, I was told. Do you buy into their stories? If u do, buy hugely Takaful ... wait to double your money!

TEH