• STMK’s 2Q20 net profit came in lower at RM75.1m (-7.2% yoy; -26% qoq) but 1H20 net profit of RM176.7m was flat yoy. 1H20 results accounted for 64% of our 2020 estimate, above our expectations.
• For 1H20, STMK saw a sharp moderation in the topline as 2Q20 gross earned contribution was down 37% qoq and 30% yoy, but 2Q20 net benefits and claims also declined sharply, neutralizing the impact on the bottomline.
• Downgrading Our Rating From Buy to HOLD on Valuation Grounds

1H20 Net Profit Held Up Yoy, Despite a Weaker 2Q20

STMK saw a 2Q20 PATAMI of RM75.1m (-26% qoq; -7.2% yoy), as the quarter was impacted by a moderation in topline growth, as implied by a decline in 2Q20 gross earned contribution (GEC). This was largely driven by a sharp decline in the Family unit’s credit Takaful and medical coverage sales (-44% qoq; -40.6% qoq), due to business disruption caused by the MCO and CMCO. The General unit also saw lower GEC (-19.4% qoq; -2% yoy). Nonetheless, the impact to the overall bottomline for 1H20 was mitigated by correspondingly lower net claims and benefits (-11% yoy). Investment income improved in 1H20 but this was negated by the equity portfolio’s fair value losses. The subdued operating performance in 1H20 also resulted in a lower Wakalah fee paid to the Takaful Operator (TO) in 2Q20 of RM144m (-50.8% qoq; -36% yoy), though this was cushioned by a higher surplus transfer in 2Q20.

2H20 may appear better for GEC growth, though claims are expected to rise

Though we expect economic activities to gradually pick up in 2H20, we are of the view that the rate of recovery for the sale of big ticket items (property and passenger vehicles) will remain slow. We expect some pick-up in personal financing growth in 2H20, but banks are likely to remain cautious. Meanwhile, as net benefits and claims are expected to rise in 2H20, this would mitigate the impact of a stronger GEC.

Downgrade to HOLD, 12-month Price Target Unchanged at RM5.10

We raise our 2020E PATAMI by 22%, in line with a better-than-expected 2Q20 net profit (as we lowered net benefits and claims and the level of investment income) vis-à-vis our previous expectation. We believe that STMK will stay resilient, underpinned by the group’s competitive edge as the preferred Takaful partner, and the shift towards Islamic banking and the online business. However, we downgrade STMK from Buy to HOLD on valuation grounds, with our Price Target unchanged at RM5.10, based on a 2021E target P/BV of 2.8x (2021E ROE at 26% and cost of equity at 11.2%). Downside/upside risks: weaker/stronger Takaful sales; improved claims ratio

Source: Affin Hwang Research - 26 Aug 2020