STMB posted 14% QoQ profit fall in 4Q22 due to weak GEC, higher net claims, other opex, and effective tax rate. Overall, results were broadly within estimates and thus, FY23-24 forecasts were left unchanged. Even though share price has recovered from its recent low, we reckon STMB has legs to run, since it remains undervalued, trading near to -1.5SD P/B. For those who want a longer-term play into the bright takaful space, we believe it is a good price point to accumulate. Maintain BUY and GGM-TP of RM4.20, based on 2.50x FY23 MFRS17 equivalent P/B.

Broadly within estimates. Syarikat Takaful Malaysia Keluarga (STMB) posted 4Q22 profit of RM75m (-14% QoQ, -52% YoY), bringing FY22 sum to RM319m (-23% YoY). This was broadly in line with expectations, forming 96-97% of our and consensus full year forecasts.

Dividend. DPS of 13.5sen (vs FY21: 12sen) was declared and paid on 16 Jan-23.

QoQ. The fall in gross earned contribution (GEC, -3%) coupled with higher net claims (+2%), other opex (+25%) and effective tax rate (+7ppt), dragged profit down by 14%. That said, stronger investment income (+7%) and smaller surplus to takaful operator/ participants (-21%), helped to lessen some of the damages above.

YoY. Again, earnings decreased 52%, owing to higher net claims (+17%), other opex (quadruple), and effective tax rate (+56ppt due to absence of deferred tax benefits). However, robust GEC (+4%), investment gains (+17%), together with lower surplus to takaful operator/participants (-20%), offset some of the above negative impacts.

YTD. Even though GEC rose 16%, the higher net claims (+29%), management costs (+9%), other opex (+32%), effective tax rate (+30ppt), coupled with lower investment income (-5%), dragged STMB’s bottom-line down by 23%.

Outlook. Although we see softer local macro climate this year, Islamic banking growth is expected to remain robust (notably, Islamic banks accelerated 12ppt faster vis-à-vis conventional peers in 2022) and spill over to its bancatakaful business. Furthermore, STMB will benefit from the recent banca partnership tie-up with Affin Islamic Bank and Agrobank. Also, we expect the employee benefit division to chug along. That said, the general takaful segment (makes up 32% of total GEC) is likely to be impacted by the ongoing Phase 2 liberalization of the fire and motor insurance sector. Regardless, the structural long-term growth prospects of STMB is bright, in our opinion, considering: (i) underpenetrated insurance space, (ii) favourable demographics, along with (iii) huge domestic protection gap.

Forecast. Unchanged since 4Q22 results were in line.

Retain BUY and GGM-TP of RM4.20, based on 2.50x FY23 MFRS17 equivalent P/B with assumptions of 23.7% ROE, 11.3% COE, and 3.0% LTG. This is above its 5-year and sector average of 1.38-2.28x; we feel the premium is fair 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 output (12ppt higher vs industry mean). Although share price has recovered from its recent low, we reckon the stock has legs to run, seeing it remains undervalued, trading close to -1.5SD P/B. For those who want a longer-term play into the bright takaful space, we believe it is a good price point to accumulate.

Source: Hong Leong Investment Bank Research - 27 Feb 2023