STMB posted 51% YoY profit growth in 4Q21, thanks to robust GEC, deferred tax benefits, and lower surplus to takaful operator/participants. Even though the results beat expectations, we are lowering FY22-23 profit estimates by 5-14% to factor in prosperity tax and cessation of wakalah tax incentive for family takaful products. Nevertheless, we still like STMB as valuations are undemanding vs historical levels (trading close to -2 SD P/B on a 5-year basis), indicating most short-term negatives surrounding the stock would have been priced in. Maintain BUY recommendation but with a lower GGM-TP of RM4.40 (from RM5.35), based on 1.80x FY22 P/B.

Exceed expectations. Syarikat Takaful Malaysia Keluarga (STMB) posted 4Q21 net profit of RM156m (doubled QoQ, +51% YoY), bringing FY21 sum to RM411m (+14% YoY). This exceeded estimates, accounting for 112-115% of our and consensus full year forecasts. Key variance was from lower effective tax rate because of deferred tax benefits; without this, PBT forms 102-105% of expectations, making results in line.

Dividend. DPS of 12sen (vs FY20: 12sen) was declared and paid on 17 Jan-21.

QoQ. Strong gross earned contribution (GEC, +25%) along with deferred tax benefits, helped bottom-line to double. That said, the spike in management expenses (+68%) and surplus to takaful operator/participants (+33%) have capped overall earnings from growing faster.

YoY. Profit growth of 51% was fuelled by robust GEC (+13%), deferred tax benefits, and lower surplus to takaful operator/participants (-12%). Again, higher management expenses (+93%) have restrained quicker earnings growth.

YTD. Similar to the drivers above, GEC improvement (+10%) and lower effective tax rate (-9ppt) boosted bottom-line expansion of 14%.

Outlook. Given economic recovery, we expect: (i) the stronger loan demand to drive up sales of credit related products, and (ii) improving employee benefits segment. On top of that, LPPSA wakalah fee growth should continue to gain traction organically. As for any adverse swing in yield curve, we think it would not significantly affect STMB’s investment-related income; we note c.90% are recurring profit generated by Islamic debt securities, deposits and dividends while the balance c.10% comes from volatile realized and unrealized gains. Furthermore, 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. Despite 4Q21 results exceeded expectations, we are cutting FY22-23 profit estimates by 5-14% to factor in prosperity tax and cessation of wakalah tax incentive for family takaful products.

Reiterate BUY but with a lower GGM-TP of RM4.40 (from RM5.35), based on 1.80x FY22 P/B (from 2.22x) with assumptions of 17.0% ROE (from 20.3%), 10.8% COE, and 3.0% LTG. This is beneath its 5-year mean of 2.86x but above the sector’s 1.47x. The discount is warranted as its ROE output is 12ppt below the 5-year average while the premium to peers is fair, considering that (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 generation (5ppt higher than industry average). We reckon most short term negatives surrounding the stock would have been priced in, seeing it is trading close to -2.0SD P/B. Thus, we believe this is a good opportunity to accumulate STMB on weakness, especially for those who want a longer-term play into the bright takaful space.

Source: Hong Leong Investment Bank Research - 25 Feb 2022