STMB posted 1Q21 flattish YoY earnings of RM101m, in tandem with a relatively unchanged GEC growth. Also, large MTM gains along with lower net benefits & claims were wiped out by the spike in surplus to takaful operator/participants. Overall, results were within expectations; thus, no change to our forecasts and we introduced FY23 estimates. We remain positive on STMB as valuations are undemanding vs historical levels (trading at -1.5SD P/B on a 5-year basis). Also, we like the stock for its longer-term prospects. Retain BUY with a higher GGM TP of RM5.50 (from RM5.40), based on 2.36x FY22 P/B.

Within estimates. Syarikat Takaful Malaysia Keluarga (STMB) posted 1Q21 net profit of RM101m (-2% QoQ, flattish YoY). This was in line with estimates, making up 27% of both our and consensus full year forecasts.

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

QoQ. The 46% drop in surplus to takaful operator/participants (mainly from the family business) helped to cushion earnings from falling sharply (-2%). Otherwise, operating profit was down 32% during the quarter; this was caused by mediocre gross earned contribution (GEC) growth (sequentially flattish), higher claims (+17%), management expenses (+20%), and lower mark-to-market (MTM) gains (-97%).

YoY. Earnings was flat in tandem with GEC growth. However, in between, operating profit was up 73%, thanks largely to RM1m MTM gains (vs a loss of RM83m in 1Q20) coupled with lower net benefits & claims (-12%). That said, it was erased by the 5-fold spike in surplus to takaful operator/participants (mainly from the family business).

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 the steepening in yield curve, we think it will not materially affect STMB’s investment related income; we note that in FY20, 88% are recurring profit generated from Islamic debt securities, deposits & dividends while the balance 12% are derived from volatile realized and unrealized gains.

Forecast. Unchanged as 1Q21 results were largely within estimates. Introduced FY23 estimates.

Maintain BUY call but with a higher GGM-TP of RM5.50 (from RM5.40), as we roll valuations to FY22. The TP is based on 2.36x P/B (from 2.60x) with assumptions of 21.4% ROE (from 23.2%), 10.8% COE, and 3.0% LTG. This is below its 5-year mean of 3.11x but above the sector’s 1. 68x. The discount is fair as its ROE output is 7ppt 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 M’sia, and (iii) generates strong ROE (7ppt higher vs industry average). Despite MCO 3.0, we remain positive on STMB as it is only a matter of time the market starts to look forward again on improving economic activities, given the ongoing Covid-19 vaccination rollout. Also, valuations are undemanding vs historical levels (trading at - 1.5SD P/B on a 5-year basis).

Source: Hong Leong Investment Bank Research - 27 May 2021