Staying Resilient Despite a Weaker Outlook

We expect the overall insurance and Takaful industry to see a weaker outlook in 2020-21, largely driven by a potential moderation in economic growth. We foresee some downside risks coming from lower vehicle sales, a weak housing market and high medical and motor claims costs, which will likely be more pronounced in 2020-2021. Likewise, we expect more modest earnings growth rates of 4.3% and 7.5% yoy for Syarikat Takaful Malaysia Keluarga in 2020-21E (from our previous forecast of 10-15%). Meanwhile, we believe that STMK will stay resilient, underpinned by the group’s competitive edge as the preferred Takaful partner, its lower-than-industry claims ratio, the shift towards Islamic banking and successful online market penetration. Despite cutting our 2020E and 2021E net earnings by 5.4-11.8%, STMK remains our sector preferred pick. Maintain BUY with a revised PT of RM7.80.

Takaful Industry Contribution Growth to Moderate in 2020-2021E

Malaysia’s general Takaful industry saw a robust 16.4% yoy growth rate in gross earned contributions for 1H19, while the Family Takaful industry grew at 29.6% yoy (based on new business contributions). However, we expect the robust growth rate to moderate in 2020-21, due to a weaker economic growth outlook (our 2020 GDP growth forecast: 4.5% vs. 4.7% in 2019E).

Even With a Potential Pullback in 4Q19, It’s Within Our Expectation

Based on feedback we obtained from STMK, management is expecting a more normalized gross earned contribution (GEC) growth in 4Q19 as there are no new banca partners signed up year-to-date 2019. The upbeat earnings in 3Q19 may likely moderate in 4Q19 as: i) mortgage drawdowns by LPPSA (civil servants’ mortgage provider) are usually slower in the fourth quarter; ii) the four preferred banca partners have met their KPIs on credit Takaful sales in 2019; and iii) we expect a slowdown in passenger car sales. That said, we do not think that these factors are an indication of a sharp slowdown for STMK’s earnings outlook.

STMK Remains Our Insurance Sector Pick; Maintain BUY, PT RM7.80

Notwithstanding a more challenging market and industry headwinds, we believe that STMK, which adopts prudent underwriting policies, gives investors some comfort given management’s good execution in the Takaful business. We reiterate our BUY rating, though we revise our 12-month Price Target down to RM7.80 (from RM8.40), based on a P/BV target multiple of 4.46x, post earnings revisions of -5.4% in 2020E and -11.8% in 2021E. Downside risks - higher claims, weaker premium growth and fraud cases.

Source: Affin Hwang Research - 19 Nov 2019