Although management remained optimistic with its short-term outlook, we are wary of some negative knock-on effect from Covid-19. Hence, we cut our 2020- 22 profit estimates by 8%, after lowering both our GEC and investment-related income assumptions. That said, the structural long-term growth prospects of STMB remain bright, in our view, looking at the: (i) underpenetrated insurance space, (ii) favourable demographics, and (iii) huge domestic protection gap. Also, valuations are inexpensive vs historical levels (trading near -2.0SD P/B). Retain BUY but with a lower GGM-TP of RM5.00 (from RM5.55), based on 2.96x FY20 P/B.

We spoke to STMB recently and got some operational updates. While the overall tone was still optimistic, we are wary of some negative knock-on effect from Covid-19.

Weaker GEC? STMB is targeting high single-digit gross earned contribution (GEC) growth in 2020. However, we believe this would be difficult to achieve considering the slowdown in loan demand is likely to drag the sales of credit related products (c.60% of total GEC); we see big ticket purchases (like houses and cars) being put on hold given uncertainty surrounding the economy. That said, appetite for personal financing should remain resilient as consumers contend with cash flow tightness. Hence, we revise down our 2020 GEC assumption to -2% from +7%.

Claims trending relatively stable. Despite the widespread of Covid-19, we gathered STMB’s claims experience is fairly benign. We reckon this is because most treatments are carried out at government hospitals (less expensive) and the number of death cases is low (thankfully). Nevertheless, the non-credit related family takaful segment (which consist of medical, term, individual & investment-linked products) is small, only forming c.15% of total GEC. Besides, we understand motor claims have been muted due to the enforcement of Movement Control Order recently.

Minimal impact from contribution deferment. In the Prihatin Economic Stimulus Package, it was announced that family takaful customers whose income were affected by Covid-19 will be offered a 3 month contribution deferment. We believe the impact to STMB is minimal, seeing merely c.15% of its GEC is on regular plans; regardless, this is really just a timing difference for GEC recognition and cash inflow. However, if any takaful certificates were left to lapse, we estimate every 1% GEC loss from its family takaful business will only shave off 0.5% of group profit.

Sharp investment income drop? Notably, FBM KLCI fell 13% YTD while the recent MGS selloff had caused the 10-year yield to spike to 3.4% (vs 3.1% average in 1Q20). However, we think these will not materially affect STMB’s investment-related income; in 2019, 88% are recurring profit generated from Islamic debt securities, deposits, and dividends while the remaining 12% are derived from volatile realized and unrealized gains. Also, the fixed income mix of total investment portfolio is 84% and the balance 6% is equity-related. Overall, we cut our +6% growth assumption for 2020 to -13%.

Forecast. Following the cut in GEC and investment-related income assumptions, we lowered our 2020-22 profit estimates by 8%.

Maintain BUY but with a lower GGM-TP of RM5.00 (from RM5.55), following our profit cut and based on 2.96x FY20 P/B (from 3.22x) with assumptions of 26.0% ROE (from 28.1%), 10.8% COE, and 3.0% LTG. This is below its 5-year mean of 3.57x but above the sector’s 1.63x. 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 (9ppt higher vs industry average).

Source: Hong Leong Investment Bank Research - 17 Apr 2020