STMB posted 12% YoY earnings decline in 3Q21, no thanks to weak GEC, poor investment showing, and higher effective tax rate. That said, 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 close to -2 SD P/B on a 5-year basis). Also, we like the stock for its bright structural long term outlook: (i) underpenetrated insurance space, (ii) favourable demographics and (iii) huge domestic protection gap. Retain BUY recommendation and GGM TP of RM5.35, based on 2.22x FY22 P/B.

In line. Syarikat Takaful Malaysia Keluarga (STMB) posted 3Q21 net profit of RM73m (-11% QoQ, -12% YoY), bringing 9M21 sum to RM255m (-2% YoY). This was within our estimates, forming 70% of full year forecasts but was below consensus at 67%.

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

QoQ. Weaker gross earned contribution (GEC, -1%), higher claims (+4%), other opex (+24%) and effective tax rate (+3ppt) caused profit to decrease 11%. That said, better investment performance (+21%) helped to cushion some of the impact above.

YoY. Earnings fell 12% given GEC contraction (-6%), poor investment showing (-9%), and higher effective tax rate (+3ppt). However, these were mitigated by lower claims (-6%), management (-2%), and other expenses (-8%).

YTD. Despite the 9% GEC improvement and lower effective tax rate (-2ppt), STMB’s bottom-line still decreased 2% due to higher claims (+4%), management costs (+6%), and surplus to takaful operator/participants (+21%; mainly from the family business).

Outlook. Given economic reopening, 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 expand again post-cut in 2H20, through organic means and gaining market share. As for any adverse swing in yield curve, we think it would not materially affect STMB’s investment-related income; we note that in FY20, 88% are recurring profit generated by Islamic debt securities, deposits and dividends while the balance 12% comes from volatile realized and unrealized gains. Besides, structural long-term growth prospects of STMB remains bright, in our view, looking at the: (i) underpenetrated insurance space, (ii) favourable demographics, and (iii) huge domestic protection gap.

Forecast. Unchanged as 3Q21 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 2.86x but above the sector’s 1.62x. 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 (7ppt higher than industry average). We reckon the recent sell-down 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 STMB on weakness, where it is also currently trading close to -2.0SD P/B.

Source: Hong Leong Investment Bank Research - 24 Nov 2021