RHB announced it will not continue with their bancatakaful service agreement with STMB upon the expiry of its 5th anniversary on 31st July 2020. That said, we believe STMB stands a fair chance to rekindle their relationship given previous business successes together. However, they will still need to bid and compete with other takaful providers to resecure this, which in turn, may hit margins. Without RHB, we estimate STMB’s FY20-21 earnings could potentially fall 2-7%. For now, our forecasts are unchanged and the stock’s risk-reward profile is still balanced. Maintain HOLD with a lower GGM-TP of RM6.20 (from RM6.70), based on 3.50x FY20 P/B.

NEWSBREAK

RHB Bank announced it has notified Syarikat Takaful Malaysia Keluarga (STMB) that it will not be continuing with their bancatakaful service agreement upon the expiry of its 5th anniversary on 31st July 2020. Now, RHB will start the process to secure a new long-term takaful partner and expects to complete this before the above timeline.

HLIB’s VIEW

Relationship may be rekindled but with lower margins? First look, this appears to be a negative development but not all hope is lost. We believe STMB stands a fair chance to rekindle their relationship given previous business successes together. However, they will still need to bid and compete with other takaful providers to resecure its tie-up with RHB, which consequently may hit margins.

Without RHB, FY20-21 earnings could potentially fall 2-7%. Based on high-level calculations (using 2018’s data points), we guesstimate the partnership with RHB generated c.RM200m of gross earned contributions p.a. Hypothetically, if we fully remove this from our FY20-21 forecasts, earnings could potentially fall by 2-7%.

Forecast. Unchanged, pending more details from management and full-year reporting is just around the corner.

Retain HOLD but with a lower GGM-TP of RM6.20 (from RM6.70), as we pegged it to a lower 3.50x FY20 P/B (from 3.82x) with assumptions of 30.2% ROE, 10.8% COE (from 10.1%), and 3.0% LTG; the higher COE is to reflect downside risk to earnings from this development. That said, this is in line to its 5-year mean of 3.57x but above the sector’s 2.23x. 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 - 22 Jan 2020