Syarikat Takaful Malaysia Keluarga (STMK) will likely deliver robust ROEs of 32-33% over 2019E-21E on the back of sale of credit-related products (which have a relatively low claims ratio), increasing market awareness of Takaful products, growth of Islamic banking and electronic intiatives. A low capex requirement also suggests the potential for special dividend payments ahead. We initiate coverage on STMK with a BUY rating and a PT of RM8.30 (at a 5.6x P/BV target).

STMK Expected to Maintain High ROEs of >30%

Our investment thesis on STMK is based on its potential to deliver ROEs of circa 33-35% in 2019E-21E, which is being driven by new growth strategies such as expansion of high-margin products such as creditrelated Takaful cover (for banks’ customers) while leveraging on the digital channels and affiliated partners for distribution (which helps in lowering agent’s fees). Part of this intiatives are already reflected in its 4Q18 earnings where net profit jumped 61.9% yoy. We are projecting a net profit growth of 23.7%/25.9%/17% for 2019E/20E/21E. Dividends also look attractive, yielding 4.4-6.5%.

Key Strengths – High Margin Products, Low-cost Model

STMK operates through its Family Takaful and General Takaful units, which distribute mostly high-margin single contribution (or premium) products. The Family claims ratio of 52.9% (below some key Takaful players), has been on a downtrend, hence mitigating the impact from rising claims at the General unit (in-line with industry). Potential upside lies in a decline in management expenses, as expansion is geared towards its digital platform and bancatakaful partners.

STMK Is in a Sweet Spot; Outperforming Industry Growth

STMK saw both its Family Takaful (2018 net earned contribution +25.6% yoy) and General Takaful (+35.3% yoy) outperforming Takaful industry growth rate of 15.2% yoy and 17% yoy respectively for 2018. We believe that STMK has been on an aggressive market expansion drive.

Initiate Coverage With a BUY Rating, Price Target at RM8.30

We initiate coverage of STMK with a BUY rating and a price target of RM8.30 (upside 85%) based on a premium valuation of 5.6x 2019E P/BV target given its leadership, superior ROEs, bancatakaful partners and being a preferred digital insurance provider. Downside risks - higher claims, weaker premium growth and fraud cases.

Source: Affin Hwang Research - 21 Mar 2019