STMB chalked in 25% QoQ profit rise in 3Q22, thanks to strong GEC and higher investment-related income. Overall, results were within expectations and hence, FY22-24 forecasts were unchanged. We still believe most short-term negatives around the stock would have been priced in, seeing it is trading close to -1.5SD P/B. Thus, we reckon this is a good opportunity to collect STMB on weakness, especially for those who want a longer-term play into the bright takaful space. Maintain BUY recommendation and GGM-TP of RM4.20, based on 2.43x FY23 MFRS17 equivalent P/B.

Within estimates. Syarikat Takaful Malaysia Keluarga (STMB) posted 3Q22 net profit of RM87m (+25% QoQ, +20% YoY), bringing 9M22 sum to RM244m (-5% YoY). This was within expectations, making up 74-75% of our and consensus full-year forecasts.

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

QoQ. Strong gross earned contribution (GEC, +15%) coupled with higher investment related income (+80%), lifted profit by 25%. That said, it was capped by a large spike in surplus to takaful operator/participants (doubled) as well as other expenses (+25%). The uptick in net claims and management expenses, however, was only 3-4%, slower than top-line growth.

YoY. Again, earnings rose 20%, thanks to robust GEC (+34%). Also, the 11% jump in investment-related income fuelled bottom-line expansion. However, higher net claims (+25%), management costs (+33%), surplus to takaful operator/participants (+34%), and effective tax rate (+19ppt), offset some of the above positive impacts.

YTD. Despite GEC growing by 20%, the higher net claims (+33%), management costs (+28%), effective tax rate (+20ppt), together with a lower investment-related income (- 13%), dragged STMB’s profit down by 5%.

Outlook. Pick-up in economic activities is good for STMB given stronger loan appetite would spur sales of credit related products. Cumulatively from Jul-Sep 2022, lending application climbed 53% YoY while system loans increased 6.4% YoY (Islamic banks accelerated 10ppt faster vis-à-vis conventional counterparts). Besides, we expect the employee benefit and general takaful segments to chug along. That said, the spike in MGS yield recently may weigh on profits. Regardless, the structural long-term growth prospects of STMB is bright, in our view, given: (i) underpenetrated insurance space, (ii) favourable demographics, and (iii) huge domestic protection gap.

Forecast. Unchanged as 3Q22 results were in line.

Retain BUY and GGM-TP of RM4.20, based on 2.43x FY23 MFRS17 equivalent P/B with assumptions of 23.1% ROE, 11.3% COE, and 3.0% LTG. This is largely in line to its 5-year mean of 2.40x but above sector’s 1.27x. The premium to peers is warranted since: (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 (1 2ppt higher vs industry average). We reckon most short-term negatives surrounding the stock would have been priced in, seeing it is trading close to -1.5SD 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 - 2 Nov 2022