Syarikat Takaful Malaysia Keluarga (STMK) reported a decent 1Q20 PATAMI of RM101.6m (+5.3% yoy; +35.3% qoq), coming in within our expectations but below consensus estimates. STMK’s gross earned contribution (GEC), declined by 1.2% yoy. Meawhile net benefits and claims crept up (+4.4% yoy; +2.5% qoq) while management expenses continued to rise yoy (albeit marginally). The group was also impacted by higher fair value losses in 1Q20, coming largely from its Family unit’s equity portfolio. As the outlook for the rest of 2020 will be weaker yoy for the overall insurance/Takaful industry, we keep our earnings forecasts unchanged. We expect STMK’s GEC to decline 5% yoy in 2020E. As we roll-forward our valuation to 2021E, we revise our Price Target to RM4.00 (potential downside risks of 15.3%). Downgrade to SELL from HOLD.

Signs of Moderation in 1Q20 Topline; Higher Claims and Expenses

STMK saw a 1Q20 PATAMI of RM101.6m (+5.3 yoy), as the quarter also saw lower surplus transfer to the Takaful Operator (TO), though Wakalah fees (paid to TO) were maintained on a yoy basis (Qoq: +16%). We saw some signs of moderation at the topline, which is represented by the decline in GEC. Net earned contribution (NEC) was down 2.6% yoy and 1.9% qoq due to a weaker Family unit (-2.1% yoy) and General unit (-4.4% yoy). We note that the overall claims ratio continued to edge up to 46.5% in 1Q20 (vs. 43% in 1Q19 and 44.4% in 4Q19), largely due to higher surrender of credit Takaful certificates and higher claims from fire and commercial classes. STMK was also impacted by higher fair value losses which was driven by the Family unit’s equity portfolio (of which, a reversal in performance is anticipated in 2Q20).

Outlook in the Coming Quarters to Stay Weak; Forecasts Unchanged

Despite a decent 1Q20, earnings in the coming quarters will be more unpredictable as a result of the COVID-19 pandemic and the movementcontrol-order (MCO), which has caused consumer sentiment to turn negative and to hold back on purchases of big-ticket-items (hence affecting credit-Takaful sales) while a slowdown in car sales will also affect its motor-class GEC.

Price Target Revised to RM4.00 (from RM3.55); Downgrade to SELL

As we roll forward our valuation horizon to 2021E, we revise our PT to RM4.00 (based on a P/BV multiple of 2.3x from 2.2x previously and based on higher BVPS of RM1.77) from our previous PT of RM3.55. We downgrade the stock to a SELL from HOLD on valuations and believe that investors should take profit and ‘sell on strength’. Potential re-rating catalysts – renewal of bancaTakaful partnership with RHB Islamic Bank. Upside risks - improved claims experience, stronger GEC growth.

Source: Affin Hwang Research - 22 May 2020