Syarikat Takaful Malaysia Keluarga’s (STMK) 9M19 net profit of RM289.7m (+41.8% yoy) was above expectations (80.5% of our and consensus estimates). The variance was driven by the stronger 9M19 net earned contribution (NEC) growth of 27% yoy vs. our full year expectation of 15.4% yoy, underpinned a robust Family unit. STMK’s overall operating results appear robust:- 9M19 gross earned contribution rose (GEC) 26% yoy; NEC at +27% yoy (Family +35.3% yoy, General +1.3% yoy); 9M19 net claims ratio improved to 42% from 54% (9M19). We have adjusted our 2019E’s net profit by 5.3% to account for the stronger 3Q19 performance. Maintain BUY rating and PT of RM8.40 (at 4.75x P/BV target).

9M19 Net Profit at RM289.7m; 3Q19 Rose 38.8% Qoq

STMK saw a 9M19 net profit of RM289.7m (+41.8 yoy), driven by robust NEC at the Family unit, which was up 35.3% yoy. 9M19 NEC growth at the General unit meanwhile tapered-off to 1.3% yoy due to a conscious move to curb the high claims experience in the motor class. At the Takaful Operator level, 9M19 fee income continued growing at 26.6% yoy, which is more than sufficient to cover the growth in management expenses (+14.5% yoy). On a qoq basis, 3Q19 net profit jumped by 38.8% largely due to the strong NEC growth at the Family unit (+19.6% qoq), which we believe is driven by the single-premium credit-related Takaful prodcuts. Overall, the better performance in 9M19 was underpinned by the shift in product strategy towards the ‘low-claims’ creditrelated products (>50% to group GEC) through STMK’s banca partners (BIMB, RHB Islamic Bank, Affin Islamic Bank, Bank Kerjasama Rakyat).

Net Claims Ratio However Inching Up at the General Unit

Although STMK’s Group net claims ratio is on a declining trend from 53.9% in 9M18 to 42% in 9M19, the claims ratio at the General unit however, is inching up from 41.4% in 1Q19 to 47.8% in 3Q19, largely due to high motor claims.

Reiterate BUY, Price Target Unchanged at RM8.40

Maintain BUY rating, with our price target of RM8.40 (based on a 4.75x P/BV target on 2020E BVPS) unchanged. Going forward, we pencil in a slower GEC growth of 12% yoy in 2020E and 10% yoy in 2021E due to lower exposure in the higher-claim employee-benefit and motor segments. Meanwhile, we have adjusted our 2019E’s net profit by +5.3% to account for the stronger 3Q19 performance (based on a higher NEC growth of 19.4% from 15%) while minor adjustments were made on 2020E-21E’s forecasts. Downside risks: weaker Islamic financing growth, higher motor and employee benefits claims, negative impact from IFRS 17 adoption (by 1Jan 2022).

Source: Affin Hwang Research - 25 Oct 2019