• We raise Syarikat Takaful Malaysia Keluarga (STMK) 2021E/22E/23E earnings by 9.1%/9.7%/14.1% as we expect gross earned contribution (GEC) to be more optimistic in 2021E, driven by company initiatives, industry drivers and the uplift of the MCO from 5 March 2021
• Moreover, we expect to see a comeback in the ‘high-margin’ credit Takaful growth this year (2020: -16.% yoy), of which was the main drag on STMK’s 2020 earnings due to the strict MCO (Mar-May 2020)
• Maintain BUY, with a higher TP of RM5.40 (from RM4.95), based on a 2.49x P/BV target multiple on 2021E BVPS (ROE at 23.5%, cost of equity 11.2%)

The Insurance Industry Expected to be in Recovery Mode in 2021

We expect the insurance industry to recover in 2021, subsequent to a weaker year in 2020, whereby the general insurance market declined 1% yoy (in terms of GWP) while new business premium of the life insurance industry was down 3.2% yoy. On the other hand, Malaysia’s Takaful industry was more resilient in 2020, growing at +4.6% yoy in gross earned contribution (at General), while the Family Takaful industry grew by 7% yoy (in new business contribution). The uplift of the MCO from 5 March onwards and vaccination program are expected to drive sentiment higher and spur economic activities.

Catalysts from credit Takaful (MRTT and personal financing) and motor segment

We are of the view that STMK’s key products, such as the ‘high-margin’ credit Takaful (comprising MRTT and personal financing coverage) will make a comeback in 2021 (after seeing a sharp decline of 16% yoy in 2020). Meanwhile, the motor segment (2020 growth rate: +26% yoy) may likely continue its robust growth in 2021 on the back of management’s digital-marketing initiatives through social media as well as through online payment platforms/apps. Pent-up demand and roll-out of new Proton and Perodua models in 2021 coupled with auto-sales tax exemption (extended until 30 June 2021), are some industry drivers. As such, we raise our 2021E/22E/23E earnings forecasts by 9.1%/9.7%/14.1% as we factor in a top-line GEC growth rate of +15%/+7.1%/+5.6%.

Maintain BUY, Raising 12-month Price Target to RM5.40 (from RM4.95)

Maintain BUY, with our Price Target raised to RM5.40 (from RM4.95), based on a 2021E target P/BV of 2.49x (2021E ROE at 23.5% and cost of equity at 11.2%) subsequent to our earnings revisions. We believe that industry drivers, the shift towards Islamic banking, new-age marketing strategies and on-going bancaTakaful partnerships will continue to underpin earnings recovery in 2021. There may also be room for higher dividend payout in 2021-23E. Downside risks: reinstatement of MCO, slowdown in business activities.

Source: Affin Hwang Research - 5 Mar 2021