Following the meeting with management last week, we find that STMB’s outlook is still mixed. Although Aeon Credit was recently secured as another preferred bancatakaful partner, its contribution is not expected to be meaningful vis-à-vis Bank Rakyat’s inclusion last year. Besides, the renewal tie-up with RHB Islamic is being negotiated and FWD Takaful is not viewed as a huge threat. However, personnel cost is seen to inch up faster on the back of more hiring to lift regular premium investment-linked product sales. Overall, our forecasts are intact and we believe the stock’s risk-reward profile remains balanced. Maintain HOLD and GGM-TP of RM6.30, based on 3.69x FY20 P/B.

We met management last week to obtain some operational updates. Overall, the outlook for Syarikat Takaful Malaysia Keluarga (STMB) remains mixed, in our opinion.

Another preferred partner. To our positive surprise, STMB has secured Aeon Credit as another preferred bancatakaful partner in Aug-19, bringing the total tie-up under this model to 7. Similar to the arrangement made with Bank Rakyat last year, this is expected to boost its credit-related products sales (riding mainly on Islamic personal financing) in the family segment. Based on management’s broad level guidance, we estimate that Aeon Credit could potentially add additional RM15-20m/qtr to gross earned contribution (immaterial at less <5% of top-line).

RHB Islamic tie-up should be renewed. The preferred partnership with RHB Islamic is due for expiration next year and we gathered that STMB is still negotiating for an extension. We believe there is a strong possibility of renewal since RHB Islamic does not has its own takaful unit to carry out the business. Besides, the outcome of RHB selling its general insurance arm to Tokio Marine is inconsequential because any potential bancassurance distribution agreement drawn as part of the deal is not seen to include Takaful products - the latter only holds conventional insurance licenses.

FWD is not viewed as a huge threat. Although FWD Takaful has been pushing hard on marketing activities recently (in attempt to steal market share away from peers), STMB is unperturbed given that: (i) FWD’s digital strategy for distribution channel and product offering has not proven to be able to take off strongly in other operating country like Indonesia, (ii) their small agency force is not a threat as the family takaful business demands high interaction with customers in order to be successful, and (iii) without a general takaful license, it does not have cross-selling opportunities.

Recruitment drive. Personnel cost is expected to inch up faster on the back of more hiring to lift regular premium investment-linked product sales - is part of the strategy to reduce overreliance on single premium credit related products (which accounts 90%+ of its family takaful business), ahead of the implementation of MFRS17 in 2022. For starters, STMB will first leverage on the network of its preferred bancatakaful partners to control cost from rising too quickly. Also, management is looking at ways to further optimize admin opex to help offset the incremental uptick in employee cost.

Forecast. We leave it unchanged as: (i) the new income stream from Aeon Credit is not expected to be material, (ii) tie-up renewal with RHB Islamic was already taken in account, and (iii) we did not factor in further management expense ratio improvement.

Retain 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 3.59x and the sector’s 2.29x. The premium is fair considering: (i) it is one of the leaders in the Islamic insurance industry, (ii) being the only pure listed takaful operator on Bursa Malaysia, and (iii) generates strong ROE (13ppt over industry average).

Source: Hong Leong Investment Bank Research - 9 Oct 2019