We see limited share price upside from current levels, having already performed exceptionally well over the past 12 months, generating returns in excess of 50% for investors. Also, the stock’s risk-reward profile is balanced, in our opinion, given good business positioning to ride the Islamic finance wave and positive structural industry dynamics, but got defused by the downward normalizing growth and unfavourable upcoming MFRS17 accounting change . Hence, we initiate coverage on STMB with a HOLD rating and GGM-TP of RM6.30, based on 3.69x FY20 P/B.

Sole listed Islamic insurance player. Syarikat Takaful Malaysia Keluarga (STMB) is a pioneer in the field of Islamic Insurance for over 3 decades in Malaysia, making it one of the leaders in this space (ranks first in family takaful while for general, it placed second among competitors). The group was established back in 1984 and now, is the sole pure listed takaful operator on Bursa Malaysia. It runs both the family and general takaful businesses along with a small overseas operation in Indonesia.

The good… Through a wide network of bancatakaful partners, STMB rides on the robust Islamic banking growth (c.15ppt faster than its conventional counterparts); BNM aims to expand the scope of Islamic financing activities and reach 40% of total bank market share by 2020 (currently 34%). Looking at the low insurance penetration rate, favourable demographics, and huge domestic protection gap, we believe the structural long-term growth prospects for the group remains bright. Also, STMB is well positioned to capture these market opportunities, considering it is a top 2 takaful operator in Malaysia (has a proven track record and business scale).

The bad… In a full-fledge liberalized market, we expect price-based rivalry to be more prevalent, hurting STMB’s profitability in the process. As for its family bancatakaful business, credit-related products growth should taper and normalize from 3Q19 on wards, given contribution from Bank Rakyat on a full-year basis has come to a tail end, coupled with a high base effect. Also, we believe STMB will be more negatively affected by the adoption of MFRS17 since single premium products make up a large 90%+ of its family takaful business. Furthermore, we noticed STMB’s surplus position for the general takaful fund has been thinning over the past 2 years.

Forecast. From FY18-21, we anticipate STMB’s earnings to grow by a slower 11% CAGR vs 24% in FY15-18. This is comes on the back of: (i) normalizing 8% premium growth p.a., (ii) lower general takaful wakalah fees growth of 6% CAGR (FY18-21) vs 19% (FY15-18), to build back the depleted surplus fund position, and (iii) conservative stance in claims assumption where we pencilled in a gradual uptick in net claims ratio of 44.6% in FY19 to 45.6% in FY21. However, these are partially mitigated by more benign management expense ratio of 17.3% in FY19-21 (1-2ppt lower vs FY15-18), to reflect more stringent cost control and digital innovation.

Initiate coverage with a HOLD and GGM-TP of RM6.30, based on 3.69x FY20 P/B with assumptions of 29.3% ROE, 10.1% COE, and 3.0% LTG. This is above its 5-year mean of 3.58x and the sector’s 2.31x. The premium is fair considering: (i) it is one of the leaders in the Islamic insurance industry and (ii) being the only pure listed takaful operator on Bursa Malaysia. Besides, it can be justified by its strong ROE generation, which is 13ppt over industry average. Also, STMB is well positioned to ride the Islamic finance wave and positive structural industry dynamics. However, the risk-reward profile is balanced by its downward normalizing growth and unfavourable upcoming MFRS17 accounting change.

Source: Hong Leong Investment Bank Research - 10 Sept 2019