Management’s tone was optimistic during our recent conversation. In general, business has started to pick up steam again on the back of economic reopening and we are now less concern of MFRS17 accounting standard adoption. As for dividends, some degree of prudence is likely to be exercised but we see payout to return to pre-covid levels in FY22. Overall, our forecasts are unchanged. We continue to like the stock for its bright structural long-term prospects: (i) under penetrated insurance space, (ii) favourable demographics and (iii) huge local protection gap. Maintain BUY and GGM-TP of RM5.35, based on 2.22x FY22 P/B.

We spoke to management recently for some operational updates. In general, the tone was optimistic.

Business begins to recover. Given tighter restrictions on movement and businesses in 3Q21, we expect gross earned contribution (GEC) to be weak (QoQ and YoY dip) but should not be as severe as seen back in 2Q20’s lockdown. Nevertheless, overall business has started to build up steam again on the back of economic reopening. As for the payment deferment program, this is seen to have little impact on STMB since most of their products are single contribution (c.90% of family GEC). Moving forward, the growth strategy is to ride and leverage on its online sales portal along with product cross selling. We are maintaining and projecting FY21-22 GEC growth of 2-5%.

Less concern with the adoption of MFRS17. We estimate the transition to MFRS17 accounting standard in 2023 would see earnings shrink by 11% (guidance: -15-20%) vs MFRS4 disclosure; that said, it will be applied retrospectively and the restatement of comparative financial information is required. Also, there will be a day 1 downward adjustment to retained profit for accounting modification on legacy single contribution certificates (book value is estimated to decrease by 20%). As such, MFRS17 ROE is anticipated to higher vs MFRS4 (+2ppt) but capital adequacy ratio (CAR) is poised to drop; however, the latter should stay above the 130% regulatory minimum and cash call risk is limited. In any case, the change in accounting standard does not alter the business nature and cash flow of single contribution products. Thus, we are now less concern with the adoption of MFRS17.

Prudent on dividends. We are maintaining our FY21 dividend payout assumption at 27%, similar to FY20’s low level since this year was also largely marred by Covid-19 headwinds and there is some MFRS17 treatment uncertainty on retained earnings for CAR computation. Hence, we think STMB will reserve capital to be prudent; our view is further supported by management’s conservative undertone. We believe FY22 is a more reasonable timeline to expect STMB reverting to the 45% divvy run-rate given abating Covid-19 woes and potentially better clarity on CAR computation.

Forecast. Unchanged. For ‘Makmur Tax’, we see it as a one-time event and thus, not baking it into our financial model; in any case, it would have an 8% impact on headline FY22 earnings performance.

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 2.86x but above the sector’s 1.61x. 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). 

We reckon the recent selldown was largely due to non-fundamental reasons (BIMB’s corporate exercise freeing up the tightly held STMB shares previously along with fund portfolio rebalancing). Hence, this presents an opportunity to accumulate the stock on weakness, where it is also currently trading close to -2.0SD P/B.

Source: Hong Leong Investment Bank Research - 11 Nov 2021