During our recent conversation, management’s tone was cautiously optimistic. STMB expects FY22 GEC to expand by high single digit and claims experience to normalize upward. Also, we gathered the transition to MFRS17 may see profit falling 15-20% but ROE rising 6ppt due to retained profit reclassification to CSM liability. Overall, our forecasts are intact and we believe it is a good opportunity to accumulate STMB on weakness, especially for those who want a longer-term play into the bright takaful space. Maintain BUY and GGM-TP of RM4.40, based on 1.80x FY22 P/B.

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

FY22 GEC expected to be better. Following strong 4Q21 gross earned contribution (GEC) showing, we expect 1Q22 to be weaker QoQ due to the lack of backlogs like in the preceding quarter. However, STMB shared that this is within its expectations and FY22 growth target of high single digit YoY (vs ours: +6%). For banca (makes up 60% of family GEC), Bank Islam is still a preferred partner and business is as usual even after decoupling away from the holding co. Also, STMB will continue to leverage on its strong LPPSA franchise (25% of family GEC) and attempt to bring in more corporate customers to grow its employee benefit business (15% of family GEC). As for general GEC, STMB will tap further onto its online sales portal to boost growth and increase fire takaful production.

Nonchalant view on MFRS17. Management reiterated the transition to MFRS17 from MFRS4 may see profit falling 15-20% but ROE possibly jumping 6ppt due to retained profit reclassification to contractual service margin (CSM) liability. Also, MFRS17 profit is expected to normalize back to MFRS4 level within 6 years with only the booking of earned CSM profit, not including new business growth. Besides, the risk of cash call is limited and STMB is still capable of paying out 12sen DPS under the MFRS17 regime. Overall, we continue to be nonchalant with the adoption of MFRS17, which is typically frowned upon by the investment fraternity; the new accounting standard does not alter the business nature and cash flow of single contribution products.

Other key updates. Claims experience should now inch up, since many patients are now seeking medical treatment after postponing at the height of Covid-19 pandemic. Furthermore, economic reopening will see more drivers on the road, leading to higher motor claims as well. Separately, STMB will focus on growing its regular contribution business faster (makes up only 10% of total GEC currently) while its Indonesian arm will continue to take a backseat; both moves are viewed positively by us as the former can generate recurring income whereas the latter is not an easy place to scale up.

Forecast. Unchanged since there were no material positive/negative updates.

Reiterate BUY and GGM-TP of RM4.40, based on 1.80x FY22 P/B with assumptions of 17.0% ROE, 10.8% COE, and 3.0% LTG. This is beneath its 5-year mean of 2.67x but above the sector’s 1.48x. The discount is fair 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 output (4ppt higher than industry average). We reckon most short-term negatives surrounding the stock would have been priced in, seeing it is trading near to -2SD 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 - 29 Mar 2022