STMB posted 9% YoY bottom-line improvement in 2Q21, thanks to a rebound in GEC growth and lower effective tax rate. Overall, results were within estimates and thus, our forecasts were unchanged. We continue to be 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 bright structural long-term prospects: (i) underpenetrated insurance space, (ii) favourable demographics and (iii) huge domestic protection gap. Maintain BUY and GGM-TP of RM5.35, based on 2.22x FY22 P/B.

Within estimates. Syarikat Takaful Malaysia Keluarga (STMB) posted 2Q21 net profit of RM82m (-19% QoQ, +9% YoY), bringing 1H21 sum to RM183m (+3% YoY). This was within estimates, forming 48-50% of both our and consensus full year forecasts.

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

QoQ. The 8% decline in gross earned contribution (GEC) along with the 26% jump in surplus to takaful operator/participants (primarily from the general business) caused earnings to decrease 19%. Otherwise, operating profit was up 6% during the quarter, thanks to lower claims (-4%), management (-3%) and other expenses (-41%).

YoY. Bottom-line rose 9% given a rebound in GEC growth (+46% as 2Q20 saw strict lockdown measures) and lower effective tax rate. However, in between, we note that operating profit was up by only 6% due to higher claims (+45%), management (+32%) and other expenses (+39%). Also, it chalked in RM5m mark-to-market (MTM) loss (vs RM48m gains in 2Q20).

YTD. The 18% improvement in GEC, stronger investment-related showing (+7%), and lower effective tax rate, lifted net profit by 3%; the performance was capped by higher claims (+9%), management costs (+11%), and surplus to takaful operator/participants (+68%; mainly from the family business).

Outlook. With the gradual economic reopening under the National Recovery Plan, we expect: (i) loan appetite to return, driving up sales of credit related products, and (ii) improving employee benefits segment. Also, LPPSA wakalah fee should start to grow again post-cut in 2H20, through organic means and gaining market share. As for any adverse swing 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 & unrealized gains. Besides, structural long-term growth prospects of STMB remains bright, in our opinion, looking at the: (i) underpenetrated insurance space, (ii) favourable demographics, and (iii) huge domestic protection gap.

Forecast. Unchanged as 2Q21 results were within estimates.

Retain BUY and GGM-TP of RM5.35, based on 2.22x FY22 P/B with assumptions of 20.3% ROE, 10.8% COE, and 3.0% LTG. This is beneath its 5-year mean of 2.98x but above the sector’s 1.70x. The discount is fair as its ROE generation is 8ppt below the 5-year average while the premium to peers is warranted, considering (i) it is one of the leaders in the Islamic insurance industry, (ii) only pure listed takaful operator on Bursa Malaysia, and (iii) strong ROE output (6ppt higher than industry average). Overall, we remain 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 - 26 Aug 2021