We were surprised by the notice of the termination (dated 15 January 2020) by RHB Islamic Bank with regards to its Bancatakaful Service Agreement with Syarikat Takaful Malaysia Keluarga, of which will officially end on 31 July 2020. We believe the underlying factor for the termination emanates from a weak credit growth envinronment, and hence it makes more sense not to renew the partnership. We cut our 2020E and 2021E net earnings by 3.4% and 7.4% respectively as we factor in slower topline growth of 7.1% and 6.0% in 2020E-21E respectively for STMK. We downgrade STMK from BUY to HOLD with a revised PT of RM5.80. 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.

Termination of Banca Partnership by RHB Islamic Bank

According to RHB Bank Berhad’s announcement yesterday, its whollyowned subsidiary RHB Islamic Bank has notified STMK of its decision not to continue with the Bancatakaful Service Agreement (in a letter dated 15 January 2020) which will come to an end upon the expiry of the 5th anniversary of the Bancatakaful Service Agreement on 31 July 2020. RHB Islamic Bank mentioned that it will start the process to secure a new long term takaful partner before 31 July 2020.

Impact on Syarikat Takaful Malaysia Keluarga

In our view, we believe that RHB Islamic has a meaningful contribution towards STMK’s Family Takaful gross earned contribution (GEC), potentially in the region of between 20-30%. Assuming this amount is removed from STMK’s topline, we foresee a decline in STMK’s GEC growth from 8.2% yoy in 2020E to 7.1% yoy and in 2021E from 8.3% yoy to 6.0% yoy.

We Downgrade STMK From BUY to HOLD, With PT RM5.80

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 downgrade our rating from BUY to HOLD, as we revise our 12-month Price Target down to RM5.80 (from RM7.80), based on a revised P/BV target multiple of 3.33x (from 4.46x), post net earnings revisions of -3.4% in 2020E (taking into account a 5-month impact from the termination of banca agreement with RHB Islamic Bank) and -7.4% in 2021E. Downside/upside risks - higher claims/improved claims experience, weaker/stronger premium growth and fraud cases.

Source: Affin Hwang Research - 16 Jan 2020