STMB chalked in 4Q20 net profit of RM103m (+25% QoQ), thanks to better gross contribution (+4%), lower net benefits & claims (-12%), coupled with tighter cost control. Overall, results beat estimates, and thus, we raise FY21-22 net profit by 1-3%. We remain positive on STMB as valuations are undemanding vs historical levels (trading at -1SD P/B on a 5-year basis). Moreover, we like the stock for its longer-term prospects. Keep BUY with higher GGM-TP of RM5.40 (from RM5.30), based on 2.60x FY21 P/B.

Beat estimates. Syarikat Takaful Malaysia Keluarga (STMB) posted 4Q20 net profit of RM103m (+25% QoQ, +37% YoY), which brought FY20 earnings to RM362m (-1% YoY). This was ahead of estimates, making up 106-108% of our and consensus full year forecasts; key variance came from lower charge on expense reserve.

Dividend. DPS of 12sen (vs FY19: 20sen) was declared and paid on 29 Jan-21.

QoQ. 4Q20 net profit rose 25%, thanks to better gross contribution (+4%) at both its family (+4%) and general (+5%) businesses. Also, lower net benefits & claims (-12%), and tighter cost control helped to amplify bottom-line. However, weaker capital gains from investments (-17%) capped performance.

YoY. Earnings jumped 37% on the back of net benefits & claims, which dropped 16%, and strict cost discipline. Besides, it was lifted by stronger capital investment-related gains (+11-fold). That said, gross contribution only ticked up 1%.

YTD. The 9% decline in gross contribution was offset by lower net benefits & claims (- 10%), better cost management, investment (+3%) and administrative income (+24%). Consequently, bottom-line fell by a mere 1%.

Outlook. Looking at the underpenetrated insurance space, favourable demographics, and huge domestic protection gap, the structural long-term growth prospects for the group remains positive, in our view. Also, via a wide network of bancatakaful partners, STMB rides on the robust Islamic banking growth (c.8ppt faster than its conventional counterparts). Besides, we are not overly concerned with the wakalah fee rate cut for the LPPSA scheme as this move can help to strengthen STMB’s market leadership in this area and the impact could be cushioned through other measures (like looking to raise management fees for risk funds and wakalah fee rate on new certificates). As for Covid-19 takaful protection, like peers, STMB does not provide medical hospitalization coverage in the event of a pandemic; regardless, medical is not large vs credit related products (the former makes up c.15% of gross contribution while the latter c.45%).

Forecast. We raise FY21-22 net profit by 1-3% to reflect better-than-expected results; lowering our expense reserve charge assumption.

Maintain BUY with a higher GGM-TP of RM5.40 (from RM5.30), following upward earnings revision and upkeeping of our model. This is based on 2.60x FY21 P/B (from 2.74x) with assumptions of 23.2% ROE (from 24.3%), 10.8% COE & 3.0% LTG. It is below its 5-year mean of 3.29x but above the sector’s 1.39x. The discount is fair as its ROE output is 6ppt under 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) only pure listed takaful operator on Bursa Malaysia, and (iii) generates strong ROE (8ppt higher vs industry average). With impending Covid-19 vaccination rollout, we remain positive on STMB, seeing it is only a matter of time when the market starts to look forward again on improving economic activities. Also, valuations are undemanding when compared to historical levels (trading at -1SD P/B on a 5-year basis).

Source: Hong Leong Investment Bank Research - 24 Feb 2021