STMB posted 4Q19 profit of RM75m (-17% YoY), no thanks to the higher surplus to takaful operator/participants at its family business. In turn, this caused FY19 results to be a tad below our expectations. Hence, we reduce FY20-21 earnings by 8-9%. However, we turn positive on STMB as valuations became inexpensive vs historical levels (trading at -1.5SD P/B), suggesting most of the negatives dragging its short-term growth have been priced-in. Also, the stock’s dividend yield of c.4-5% is decent. Upgrade to BUY but with a lower GGM-TP of RM5.55 (from RM6.20), based on 3.22x FY20 P/B.

A tad below expectations. Syarikat Takaful Malaysia Keluarga (STMB) posted 4Q19 net profit of RM75m (-33% QoQ, -17% YoY), bringing FY19 sum to RM365m (+24%). This was a tad below our expectations, making up 93% of our full-year forecasts but came in within consensus (97%). Key variance was higher-than-expected surplus to takaful operator/participants at the family business.

Dividend. DPS of 20sen (+33% YoY) was declared and paid on 2 Jan-20.

QoQ. 4Q19 net profit fell 33%, no thanks to slower gross contribution (-3%) at both its family (-2%) and general (-5%) businesses. The fall was further aggravated by higher management expenses (+30%).

YoY. Gross contribution rose 5% on the back of better credit-related products sales at its family takaful business (+7%). However, the surplus to takaful operator/participants jumped 51% (mainly from the family business) and dragged down bottom-line by 17%. Otherwise, operating profit was up 19%.

YTD. Net earnings grew 24% due to: (i) 20% rise in gross contribution, (ii) 1% drop in claims, and (iii) 69% surge in investment-related gains. That said, the 2-fold increase in surplus to takaful operator/participants, capped FY19 performance to be stronger.

Outlook. Over the next 1 year, STMB has to contend with the possibility of losing its bancatakaful tie-up with RHB (which we believe will likely be renewed but with more competitive terms) and a challenging Public Sector Home Financing Board (LPPSA) business. However, looking at the (i) underpenetrated insurance space, (ii) favourable demographics, and (iii) huge domestic protection gap, the structural long-term growth prospects for the group remains bright, in our opinion. Also, via a wide network of bancatakaful partners, STMB rides on the robust Islamic banking growth (c.6ppt faster than its conventional counterparts).

Forecast. We cut FY20-21 earnings by 8-9% to mainly account for the higher surplus to takaful operator/participants. Also, we introduce FY22 estimates.

Upgrade to BUY (from Hold) but with a lower GGM-TP of RM5.55 (from RM6.20), following our profit cut and based on 3.22x FY20 P/B (from 3.50x) with assumptions of 28.1% ROE (from 30.2%), 10.8% COE, and 3.0% LTG. This is below its 5-year mean of 3.59x but above the sector’s 2.05x. The discount is warranted as its ROE output is 2ppt below 5-year average while the premium to peers 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 (12ppt higher vs industry average). Overall, we turn positive on STMB as valuations became inexpensive vs historical levels (trading at -1.5SD P/B), suggesting most of the negatives dragging its short term growth have been priced-in. Also, the stock’s dividend yield of c.4-5% is decent.

Source: Hong Leong Investment Bank Research - 26 Feb 2020