STMB chalked in 3Q20 net profit of RM83m (+10% QoQ), thanks to better gross contribution (+54%); it could have improved further if not for the lower capital investment-related gains and the rise in surplus to takaful operator/participants. Overall, results were within expectations and thus, no changes to our forecasts. We remain positive on STMB as valuation is undemanding vs historical levels (at -1SD P/B), implying most of the negatives dragging short-term growth have been priced-in. Also, we like the stock for its longer-term prospects. Retain BUY and GGM-TP of RM5.30, based on 2.74x FY21 P/B.

Within expectations. Syarikat Takaful Malaysia Keluarga (STMB) recorded 3Q20 net profit of RM83m (+10% QoQ, -27% YoY), which brought 9M20 earnings to RM259m (-11% YoY). This was in line with estimates, making up 76-78% of our and consensus full-year forecasts.

Dividend. None Declared as STMB Only Divvy in 4Q.

QoQ. 3Q20 net profit rose 10%, thanks to better gross contribution (+54%) at both its family (+75%) and general (+18%) businesses. However, we note bottom-line growth would have improved more if not for the lower capital investment-related gains (-48%) and 34% rise in surplus to takaful operator/participants (mainly coming from the family segment).

YoY. Bottom-line dropped 27% on the back of the decline in gross contribution (-6%), higher management expenses (+10%), surplus to takaful operator/participants (+9%), and effective tax rate (+8ppt to 15%). However, this was moderately cushioned by the RM35m capital investment-related gains (vs RM3m loss in 3Q19).

YTD. Similarly, gross contribution fell 12% and earnings was down 11%; the lower net benefits & claims (-8%), strict cost discipline, and the 24% decline in surplus to takaful operator/participants, provided some offsetting impact.

Outlook. Looking at the underpenetrated insurance space, favourable demographics, and huge domestic protection gap, the structural long-term growth prospects for the group remains bright, in our view. Also, via a wide network of bancatakaful partners, STMB rides on the robust Islamic banking growth (c.6ppt faster than its conventional counterparts). Besides, we are not overly concerned with the wakalah fee rate cut for Lembaga Pembiayaan Perumahan Sektor Awam (LPPSA) scheme as this move can further help to cement STMB’s market leadership in this space and the impact could be cushioned through other measures (like looking to raise management fees for risk funds and wakalah fee rate for new takaful certificates).

Forecast. Unchanged as 3Q20 Results Were Within Estimates.

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 3.39x but above the sector’s 1.43x. 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 short -term growth have been priced-in.

Source: Hong Leong Investment Bank Research - 25 Nov 2020