STMB registered 14% YoY profit decline in 1Q22, no thanks to weak investment performance along with higher net claims, management expenses, and effective tax rate. Overall, results were within estimates and thus, FY22-23 forecasts were kept and we introduce FY24 projections. We still 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 1.79x FY22 P/B.

Within estimates. Syarikat Takaful Malaysia Keluarga (STMB) posted 1Q22 net profit of RM87m (-44% QoQ, -14% YoY). This was within expectations, making up 24-27% of our and consensus full-year forecasts.

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

QoQ. Weak gross earned contribution (GEC, -1%), investment-related income (-47%) along with higher net claims (+37%), other expenses (+4-fold) and effective tax rate (+40ppt from prosperity tax and lower deferred tax benefits), dragged earnings down by 44%. However, the lower surplus to takaful operator/participants (-86%) helped to cushion some of the damages.

YoY. Although GEC rose 12%, profit still decreased by 14%, no thanks to higher net claims (+48%), management expenses (+23%), and effective tax rate (+17ppt). Also, the decline in investment-related income (-32%) further aggravated weakness at the bottom-line. Again, lower surplus to takaful operator/participants (-78%) softened the above negative impacts.

Outlook. Given economic recovery, we expect STMB to benefit from: (i) stronger loan appetite as this will drive up sales of credit related products, (ii) improving employee benefits segment, and (iii) more demand for general takaful products. However, the steepening of yield curve is seen to drag investment performance over the near-term. That said, the structural long-term growth prospects of STMB remains bright, looking at the: (i) underpenetrated insurance space, (ii) favourable demographics, along with the (iii) huge domestic protection gap.

Forecast. Unchanged as 1Q22 results were in line and we introduce FY24 estimates.

Reiterate BUY and GGM-TP of RM4.40, based on 1.79x FY22 P/B with assumptions of 17.0% ROE, 10.9% 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 - 12 May 2022