• STMK saw a robust 4Q20, with pre-tax profit and net profit up 20% and 25% qoq respectively, underpinned by lower net claims and overheads. 2020 net profit of RM362.4m was flat yoy, coming in 9% above our and street estimates
• In 4Q20, STMK’s gross earned contribution (GEC) continued to improve at both the Family and General units (qoq), despite the reinstatement of the MCO and bearing the impact of a lower Wakalah fee from LPPSA (the government’s civil service financing arm) and a slower mortgage market
• We upgrade our rating to BUY (from HOLD) on valuation grounds, with our price target of RM4.95 unchanged (based on a 2.34x P/BV target on 2021E BVPS)

2020 net profit flat yoy, driven by a robust 4Q20 (net profit +25% qoq; +37.3% yoy)

STMK saw a more robust 4Q20, which was driven by lower expenses on a yoy and qoq basis (including net benefits and claims, management expenses and release of expense reserve). At the topline, gross earned contribution (GEC) was healthy at both the Family and General units, growing 3.9% qoq due to credit Takaful sales and motor class sales growth. Nonetheless, 2020 growth declined 8.5% yoy due to weaker credit Takaful sales (driven by a slower mortgage market) and revision in the LPPSA Wakalah fee. The overall 2020 net claims ratio continued to edge up to 43.7% (vs. 42.6% in 2019) on the back of higher Family unit claims (46%; from medical claims, death and surrender) while the General unit saw the net claims ratio declining to 35% (vs. 47% in 2019) due to lower motor claims. Meanwhile, 2020 also saw higher realized gains in the Family unit and lower fair value gains vis-a-vis 2019.

More opportunities could arise as more businesses are allowed to operate

Though we had expected a slower 4Q20 given a slower housing market coupled with lower realized and fair value gains, STMK had outperformed our expectations. Meanwhile, as more businesses are allowed to operate (under the MCO), we believe that this will continue to drive the economy and employment, as well as restore confidence in the market. Hence, we believe that there is room for earnings upgrades and higher dividends in the near term (as the payout in 2020 was lower at 27.5% vs. 45.5% in 2019).

Upgrade to BUY on Valuation Grounds. TP Unchanged at RM4.95

STMK is likely to stay resilient, underpinned by its competitive edge as the preferred Takaful partner, and the shift towards Islamic banking and online sales. We roll out our 2023E forecasts with top-line GEC growth assumptions of flat/+7.4%/7% yoy for 2021E/22E/23E. We upgrade our rating to BUY, with the Price Target unchanged at RM4.95, based on a 2021E target P/BV of 2.34x (2021E ROE at 21.7% and cost of equity at 11%). Downside risks: weaker Takaful sales; rise in claims ratio.

Source: Affin Hwang Research - 24 Feb 2021