STMB posted 1Q20 net profit of RM102m (+5% YoY), thanks to lower surplus to takaful operator/participants at its family business; also, quarterly GEC held up well. Despite forming 28-30% of our and consensus full year forecasts, we deem results to be largely in line as we believe GEC will taper in subsequent quarters. Forecasts were unchanged. Overall, we turn less positive on STMB, considering its recent price recovery and risk-reward profile seems more balance. Besides, there are short-term headwinds from the Covid-19 crisis. Lower to HOLD (from Buy) but with an unchanged GGM-TP of RM5.00, based on 2.96x FY20 P/B.

Largely in line. Syarikat Takaful Malaysia Keluarga (STMB) posted 1Q20 net profit of RM102m (+35% QoQ, +5% YoY). This was largely within expectations, making up 28- 30% of our and consensus full year forecasts; we believe gross earned contribution (GEC) will taper in subsequent quarters due to the confluence of events from Covid- 19 crisis and imminent recession.

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

QoQ. The 84% drop in surplus to takaful operator/participants (mainly from the family business) led to a bottom-line increase of 35%. Otherwise, operating profit was down 45% during the quarter; this was caused by flattish GEC growth and RM83m mark-to market (MTM) losses (vs RM1m gain in 4Q19).

YoY. Similarly, earnings grew by 5%, thanks to the 80% decline in surplus to takaful operator/participants. Again, if not for this, operating profit saw a 44% decrease given a 1% fall in GEC and MTM losses of RM83m (vs RM21m gain in 1Q19).

Outlook. We see short-term headwinds from the Covid-19 crisis: (i) slowdown in loan demand is likely to drag the sales of credit related products, (ii) potential family takaful customers on regular plans may drop out, and (iii) low interest rate environment may lead to higher takaful contract liabilities. Moreover, the Public Sector Home Financing Board (LPPSA) business is challenging. That said, the structural long -term growth prospects of STMB remain bright, in our opinion, looking at the: (i) underpenetrated insurance space, (ii) favourable demographics, and (iii) huge domestic protection gap. Also, via a wide network of bancatakaful partners, STMB rides on the robust Islamic banking growth in the medium-term (c.6ppt faster than its conventional counterparts).

Forecast. Unchanged as 1Q20 results were largely within estimates.

Lower to HOLD (from Buy) but with an unchanged GGM-TP of RM5.00, based on 2.96x FY20 P/B with assumptions of 26.0% ROE, 10.8% COE, and 3.0% LTG. This is below its 5-year mean of 3.57x but above the sector’s 1.62x. The discount is fair as its ROE output is 2ppt below the 5-year average while the premium to peers is warranted 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). Overall, we turn less positive on STMB, seeing its recent share price recovery and the risk-reward profile now seems more balance. Also, there are short-term headwinds as discussed above.

Source: Hong Leong Investment Bank Research - 25 May 2020