• Syarikat Takaful Malaysia Keluarga (STMK) is expected to see a weaker year in 2020, as a result of slower growth in Takaful cover for motor and property assets. A revision in the Wakalah fee derived from the civil service mortgage financing market may have a marginal impact (3-4%) on 2H20 net earnings.
• Nonetheless, given STMK’s asset mix, which is geared towards the highmargin ‘credit Takaful’, we believe that potentially higher demand for personal financing may make up for the loss of income from other segments.
• Maintain HOLD, with a revised TP of RM4.95 (from RM5.10), based on a 2.66x P/BV target multiple on 2021E BVPS (ROE at 24.3%, cost of equity 11%).

The insurance industry growth to moderate in 2020, may recover in 2021

We expect the insurance industry growth to moderate in 2020, in line with a weaker economic growth outlook (our 2020/21 GDP growth forecast: -4.5% and +6%). Malaysia’s general Takaful industry was flat in 1H20, at +0.6% yoy in gross earned contribution, while the Family Takaful industry declined 1.9% yoy based on 1H20 new business contribution. The Takaful industry continues to outperform the conventional market.

Impact of COVID-19 pandemic hits 2Q20; LPPSA Wakalah fee revision in Aug

As at 1H20, STMK saw a sharp decline of 18.7% yoy in the Family unit’s new business contribution, which was largely attributable to a sharp slowdown in credit Takaful growth, attributable to the MCO/CMCO. Meanwhile, STMK Family unit will also be affected by a downward revision in LPPSA’s Wakalah fees (starting August 2020).

Higher personal financing to make up for slower property and car markets

Though we expect economic activities to gradually pick up in 2H20, we are of the view that a recovery in bigger ticket items (property and passenger vehicles) will remain slow, though there are some catalysts such as the exemption in the auto sales tax. Nonetheless, potentially higher refinancing volumes of personal financing may drive stronger growth in Takaful life cover (at its Banca partners) and is expected to make up for the slower growth in motor policies and mortgage level term Takaful (MLTT).

Maintain HOLD, 12-month Price Target Revised to RM4.95 (from RM5.10)

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. Our assumptions for 2020E/21E/22E include a top-line GEC growth of -15%/ +8.2%/+7.4% yoy. Maintain HOLD, with our Price Target revised to RM4.95 (from RM5.10), based on a 2021E target P/BV of 2.66x (2021E ROE at 24.3% and cost of equity at 11%) subsequent to our marginal earnings revisions. Downside/upside risks: weaker/stronger Takaful sales.

Source: Affin Hwang Research - 8 Oct 2020