STMB posted 2Q20 earnings of RM75m (-7% YoY), no thanks to weaker gross contribution (-30%) but was softened by lower net benefits & claims, strict cost discipline and higher MTM gains. Overall, results were within expectations and hence, no changes to our forecasts. We stay positive on STMB as valuations is undemanding vs historical levels (trading at -1SD P/B), implying most of the negatives dragging its short-term growth have been priced-in. Retain BUY with a higher GGM-TP of RM5.30 (from RM5.00), as we roll valuations to FY21; the TP is based on 2.74x P/B (from 2.96x).

Within expectations. Syarikat Takaful Malaysia Keluarga (STMB) recorded 2Q20 net profit of RM75m (-26% QoQ, -7% YoY), which brought 1H20 earnings to RM177m (- 1% YoY). This was within expectations, making up 52-55% of our and consensus full year forecasts.

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

QoQ. 2Q20 net profit fell 26%, no thanks to weaker gross contribution (-37%) at both its family (-44%) and general (-19%) businesses. However, it was cushioned by lower net benefits & claims (-42%), tighter cost control, and RM48m mark-to-market (MTM) gains (vs RM83m loss in 1Q20).

YoY. Similarly, gross contribution declined 30% but earnings was down only 7%; this was again because of net benefits & claims, which dropped 30%, strict cost discipline, and the doubling of MTM & realized gains.

YTD. Bottom-line fell 1% due to the 15% decrease in gross contribution. However, this was softened by lower net benefits & claims (-11%), better cost management, and the 43% drop in surplus to takaful operator/participants (mainly from the family business).

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.3ppt faster than its conventional counterparts).

Forecast. Unchanged as 2Q20 results were within estimates.

Retain BUY with a higher GGM-TP of RM5.30 (from RM5.00), as we roll valuations to FY21. The TP is based on 2.74x P/B (from 2.96x) with assumptions of 24.3% ROE (from 26.0%), 10.8% COE, and 3.0% LTG. This is beneath its 5-year mean of 3.50x but above the sector’s 1.69x. 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 (10ppt higher vs industry average). Overall, we stay positive on STMB as valuations is undemanding vs historical levels (trading at -1SD P/B), implying most of the negatives dragging its short-term growth have been priced-in.

Source: Hong Leong Investment Bank Research - 26 Aug 2020