Syarikat Takaful Malaysia Keluarga (STMK) ended 2019 with a net profit of RM364.8m (+23.7% yoy), coming in within our and consensus estimates. Robust performance for the year was fuelled by a gross earned contribution (GEC) growth of 19.8% yoy (in-line with our expectation) while seeing improvement in the net claims ratio from 48.7% (2018) to 42.6% in 2019. In-line with a 21% yoy increase in Takaful Operator’s (TO) income (driven by expansion in Wakalah fee primarily from the Family unit), management of STMK proposed a higher 20 sen DPS for 2019 vis- à-vis 15 sen in 2018. Meanwhile, a weaker 4Q19 net profit (-33% qoq) was largely attributable to slower credit Takaful sales, although already factored into our 2019 forecasts. We nevertheless revise down our 2020E- 21E net profit by 1.6% and 2.5% to account for a more muted economic growth, with GEC of 3.8-3.9% p.a. (from 6-7% previously). Maintain HOLD, with a lower PT of RM5.20 (based on a lower P/BV target multiple of 3.1x).

2019 Net Profit Jumped 23.7% Yoy to RM364.8m; But 4Q19 Saw a Pullback

STMK saw a 2019 net profit of RM364.8m (+23.7 yoy), driven by robust NEC at the Family unit, which was up 15.7% yoy while the General unit saw a slower NEC growth of 3.4% yoy due to a conscious move to curb the high claims experience in the motor class. At the Takaful Operator level, total income of RM1.18bn grew at 23.3% yoy, which was more than sufficient to cover the growth in overall expenses (+23% yoy). Nonetheless, moderation in 4Q19 net profit (-33.1% qoq) was largely expected as STMK had a robust quarter in 3Q19 (which saw net profit jump 38.8% qoq). We understand from management that mortgage drawdowns in the civil force’s market is seasonally slower in 4Q, while its key preferred bancaTakaful partners had met their KPIs for 2019 prior to 4Q19 (hence slower productivity in 4Q19).

Earnings Revisions of -1.6/-2.5% for 2020E/21E; Introducing 2022E

Meanwhile, we have adjusted 2020E-21E’s net profit by -1.6% and -2.5% respectively, as we factor in expectation of slower GEC growth of 3.8-3.9% yoy in light of the a more muted economic outlook.

Maintain HOLD, With Lower Price Target of RM5.20

We maintain our HOLD rating on the stock, but with a lower Price Target of RM5.20 (after lowering our P/BV target multiple from 3.33x to 3.1x, in light of weaker investor sentiment as driven by prolonged market uncertainties). Potential re-rating catalysts – renewal of bancaTakaful partnership with RHB Islamic Bank. Downside/upside risks - higher claims/improved claims experience, weaker/stronger premium growth.

Source: Affin Hwang Research - 26 Feb 2020