When contacted, management sounded optimistic as some recovery was seen post-MCO; we understand that GEC has picked up momentum since Jul-20 and claims trend remained relatively stable. As for the LPPSA wakalah fee rate cut, we are not overly concerned as STMB can rely on other levers to plug the hole. Besides, management intends to divvy this year and we think BNM will not pour cold water on their plan. Overall, forecasts were unchanged. We continue to like the stock for its longer-term prospects and current valuation is undemanding at -1.5SD P/B. Retain BUY and GGM-TP of RM5.30, based on 2.74x FY21 P/B.

We managed to touch base with STMB to get some operational updates; the general tone was optimistic as some recovery was seen. We still like STMB for its longer-term prospects.

GEC recovering. No thanks to Covid-19 headwinds, gross earned contribution (GEC) has declined 15% in 1H20; this was largely dragged by weaker sales of credit related products (accounting for c.50% of total GEC). That said, we gathered overall business has picked up momentum since Jul-20. However, management alluded it is unable to cover for the GEC shortfall during the Movement Control Order (MCO). For now, we keep our FY20 GEC growth assumption at -2%; every 1% drop in GEC could reduce STMB’s net profit by 1%.

Lower LPPSA wakalah fee not concerning. We understand the wakalah fee rate for Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA) scheme was cut to 25% from 40% in 2H20 (the 5-year avg for family takaful is 29%); this segment contributes 10-20% to total GEC. According to STMB, 2H20 earnings impact is c.3-4% and when annualized is about 7%; we are not overly concerned as it further cements leadership in this space (>45% market share) and could potentially cushion this through other measures (like looking to raise management fees for risk funds and wakalah fee rate for new takaful certificates).

Claims trend relatively stable. We gathered that STMB’s claims trend after Jun-20 is relatively the same as last year (42% of net earned contribution vs 1H20: 46%); in our financial model, we have already built-in similar run-rate of 44% for FY20. Besides, STMB is committed to stay operationally lean and keep management expenses under control through reining in variable costs.

Likely to pay dividends. STMB intends to divvy this year and their payout is typically in December (as observed for the past 4 years). However, this is subject to BNM’s approval and we do not think they will pour cold water on STMB’s plan; we note LPI Capital (a competitor) was successful in paying out dividends in Aug-20. Accordingly, we assumed a dividend payout of 20sen in FY20, matching FY19’s sum, as it is backed by resilient profits. The stock is now offering decent dividend yield of c.5%.

Forecast. Unchanged.

Retain BUY and GGM-TP of RM5.30, based on 2.74x FY21 P/B with assumptions of 24.3% ROE, 10.8% COE, and 3.0% LTG. This is beneath its 5-year mean of 3.38x but above the sector’s 1.54x. 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 -1.5SD P/B), implying most of the negatives dragging its short-term growth have been priced-in

Source: Hong Leong Investment Bank Research - 3 Nov 2020