Being the only pure takaful operator listed  on Bursa Malaysia,  Takaful Malaysia is trading at a cheap FY13PER of 7.1x. Thanks to the large regional Muslim population, low family takafulpenetration rate and its niche expertise, we expect the company to grow itsearnings consistently moving forward. We believe its Indonesian operations offerimmense potential as the family takaful penetration rate stands at only 1% ofthe population in a country with more than 213m Muslims. We are initiatingcoverage on Takaful Malaysia with a FV of RM4.42 pegged to 10x FY13 PER.

Undervalued.Takaful Malaysia is currently trading at 0.9x FY13 P/BV and 7.1x FY13 PER. Wethink that it deserves to trade at more than 10x forward earnings due to itsconsistent double-digit ROE and dividend payout. Based on our calculations, weestimate the group's FY13 net profit at 44.2 sen per share. Hence, we valueTakaful Malaysia at RM4.42 pegged to 10x FY13 EPS. Among some of theassumptions behind our earnings estimates are: (i) 20% growth in gross writtencontribution for both general and family takaful, (ii) stable overall claimsratio of 65-68% for both general and family takaful, and (iii) +15% growth per yearin investment income.

Only operatoroffering 15% no claim rebate. Presently,  Takaful Malaysia isthe only takaful operator which offers a 15% no claim rebate for all itsgeneral insurance products and selected family takaful products. Essentially,policyholders stand a chance to get back 15% of their premiums at the end ofeach year if the fund is profitable and if they make no claims. With the launchof its 'We Should Talk' campaign this year, we think that  Takaful Malaysia is poised to secure more newpremiums in the medium term. Positive macro outlook in Malaysia.  The takaful industry has been experiencingstrong growth in Malaysia during the last decade  on the back of various government initiativesto promote the country as a global Islamic financial centre. We see tremendouspotential in the life takaful business as demand for healthcare strengthens dueto demographic shifts, coupled with the fact that the family takafulpenetration rate was merely 10% of the population in 2010.

Initiate with BUY.  In view of the industry's positive macrooutlook, the large Muslim population in Malaysia and Indonesia as well as thecompany's cheap valuation, stable dividend payout and strong balance sheet, weare initiating coverage on Takaful Malaysia with a BUY  recommendation. Our FV of RM4.42 is based on10x FY13 PER. Key rerating catalysts include: (i) sharp improvement inunderwriting margins, (ii) higher-than-expected premium growth, and (iii)lower-than-expected management expenses.

Source: OSK188