STMB chalked in 3Q19 bottom-line of RM112m (+34% YoY) due to better gross contribution, flattish claims, and good cost controls. However, 9M results were ahead of estimates on the back of better-than-expected investment gains and smaller-than-expected net change in contract liabilities. Hence, we raise FY19- 21 earnings by 6-10%. Overall, the stock’s risk-reward profile is still balanced, in our opinion, given good business positioning to ride the Islamic finance wave and positive structural industry dynamics, but defused by unfavourable up coming MFRS17 accounting change and downward normalizing growth. Retain HOLD with a higher GGM-TP of RM6.70 (from RM6.30), based on 3.82x FY20 P/B.

Beat expectations. Syarikat Takaful Malaysia Keluarga (STMB) registered 3Q19 net profit of RM112m (+39% QoQ, +34% YoY), bringing 9M19 sum to RM290m (+42%). This beat ours and consensus estimates, making up 80-82% of full-year forecasts. Key variances were better-than-expected investment gains and smaller-than-expected net change in contract liabilities.

Dividend. None declared as STMB only divvy in 4Q.

QoQ. 3Q19 net profit jumped 39%, thanks to better gross contribution (+14%) at both its family (+17%) and general (+3%) businesses. The rise was further augmented by the slower surplus to takaful operator/participants (+6%) and decline in taxes (-46%).

YoY. Gross contribution increased 17% on the back of better credit-related products sales at its family takaful business (+25%). This coupled with flattish claims and a mere 1% tick-up in management expenses, led bottom-line to spike 34%.

YTD. Net earnings grew 42% due to: (i) 26% rise in gross contribution, (ii) 1% drop in claims, and (iii) 44% surge in investment-related gains. However, the 2.5-fold increase in surplus to takaful operator/participants, capped 9M19 performance to be stronger.

Outlook. Looking at the underpenetrated insurance space, favourable demographics, and huge domestic protection gap, the structural long-term growth prospects for the group remains bright, in our view. Also, via a wide network of bancatakaful partners, STMB rides on the robust Islamic banking growth (c.15ppt faster than its conventional counterparts). However, STMB is seen to be more negatively affected by the adoption of MFRS17 since single premium products make up a large 90%+ of its family takaful business. In the near-term, credit-related products growth should taper and normalize from this quarter onwards, since contribution from Bank Rakyat on a 12-month basis has come to a tail-end, coupled with a high base effect.

Forecast. We raise FY19-21 earnings by 6-10% to account for the strong results; this came mainly from higher investment-related gains and lower net change in contract liabilities.

Retain HOLD but with a higher GGM-TP of RM6.70 (from RM6.30), following our earnings uplift and based on 3.82x FY20 P/B (from 3.69x) with assumptions of 30.2% ROE (from 29.3%), 10.1% COE, and 3.0% LTG. This is above its 5-year mean of 3.57x and the sector’s 2.29x. The premium is fair given: (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). 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 - 31 Oct 2019