Syarikat Takaful Malaysia Keluarga’s (STMK) 1H19 net profit rose +47.3% yoy and came in within our and consensus estimates. Nonetheless, we were taken aback by the lower Wakalah fee earned in 2Q19, primarily due to lower gross earned contribution and the requirement for higher actuarial reserves. Otherwise, STMK continued to report robust operating results:- 1H19 gross earned contribution rose 31.6% yoy (Family +43.5% yoy, General +8.1% yoy); 1H19 net claims ratio improved to 42.5% from 57% (1H18). As management’s strategy is on improving profitability and returns in 2H19, we anticipate lower exposure in the higher-claim employee-benefit and motor segments, hence a slower topline growth but overall claims experience is expected to improve. Maintain BUY. We rollover our valuation horizon to 2020, resulting in a revised PT of RM8.40.

1H19 Net Profit at RM177.4m; 2Q19 However Was Down Qoq

STMK saw a 1H19 net profit of RM177.4m (+47.3 yoy), falling within expectations. At the Group level, 1H19 profits were underpinned by a gross earned contribution (GEC) growth of 31.6% yoy (of which also translated into higher Wakalah fee income for the Takaful Operator (TO)), a 15% growth in investment income, positive fair value gain on investments and lower net claims (-2.1% yoy). This was however offset by higher 1H19 expense reserves (+42% yoy) and the need to allocate higher actuarial reserves for the Family Takaful fund in 2Q19. On a qoq basis, net profit was down 16.1% due to a 10.8% moderation in GEC (as STMK scaled back sale on employee benefit products) and due to a higher surplus transfer of income for actuarial reserves. We expect this to gradually normalize ahead. Overall, the better performance in 1H19 was underpinned by the shift in product sale towards the ‘low-claims’ credit-related products (>50% to group GEC) through STMK’s banca partners.

Increased Wakalah Fee Income Drives 1H19 Revenue at Takaful Operator

At the TO level, we saw a 1H19 net revenue growth of 34.5% yoy, mainly through Wakalah fees. On a qoq basis, TO’s net revenue declined by 18.8%, primarily due to lower Wakalah fees (-23% qoq).

Reiterate BUY, Price Target Revised Up to RM8.40 (from RM8.30)

We maintain our BUY rating, with our price target now based on 2020 valuation horizon, at RM8.40 (based on a 4.75x P/BV target) from RM8.30 (at a 5.6x P/BV target). We revise down our 2019E-21E forecasts by 0.7-9.9% to factor in a lower GEC growth of 10-15.6% (from 10%-24%), higher management expenses/commissions and lower claims experience. Downside risks: higher actuarial risks, weaker Islamic financing growth.

Source: Affin Hwang Research - 26 Jul 2019