Following our ASEAN Corporate Day in Singapore where we showcased Syarikat Takaful Malaysia (Takaful Malaysia), we are maintaining our NEUTRAL call on  the company with fair value raised from RM4.60 to RM5.50. Our earnings forecast has been  raised  by  7.7%  for  FY12  and  19.4%  for  FY13,  factoring  in  higher  wakalah fees. While we continue to like the company's growth outlook, we deem the stock fairly  valued  now  following  its  87.5%  rally  since  we  initiated  coverage  in  March 2012.

Family,  general  takaful  business  prospects  encouraging.  Insurance  Services  of Malaysia  (ISM)'s  recent  statistics  showed  the  market  shares  of  individual  takaful operators  in  Malaysia  as  at  1Q12.  We  note  that  Takaful  Malaysia  is  the  only  operator among the top three players in the overall takaful category which recorded an increase in market share ' up by 5%. In contrast, the market shares of Etiqa and Takaful Ikhlas SB,  respectively  the  largest  and  third  largest  takaful  players  by  market  share, shrank 4%.

Higher  wakalah  fees  to  lift  profits.  We  believe  Takaful Malaysia's wakalah fees will continue  to  grow  at  a  faster-than-expected  pace,  driven  by  its  strategic  tie-ups, especially in bancatakaful. The products distributed via these tie-ups are mostly wakalah credit  products  that  are  usually  tied  to  personal  financing.  We  are  raising  our  core  net profit estimates for FY12 and FY13 by 7.7% and 19.4% respectively, backed by higher wakalah  fees  and  higher  investment  yields.  Compared  with  our  previous  forecasts,  we have  raised  our  wakalah  fees  estimate  by  2.9%  for  FY12  and  10.9%  for  FY13  for  the family takaful business, and 18.6% for FY12 and 13.4% for FY13 for its general takaful business.  The  higher  wakalah  fees,  which  will  boost  earnings  to  the  company's shareholders' funds, would translate into lower underwriting margins for the participants' account,  thus  reducing  the  total  transfers  for  both  businesses  marginally  in  FY12  by 1.2%.

Maintain NEUTRAL. While we like the company's growth prospects, we are maintaining our  NEUTRAL  recommendation  on  the  stock  as  it  is  currently  trading  at  10.7x  FY13 EPS and 1.7x PBV, which we think is fair. This is also in line with the average industry PER  for  conventional  insurance  players.  Although  Takaful  Malaysia  has  yet  to  have  a dividend  policy,  management  reaffirmed  that  it  intends  to  pay  out  at  least  30%  of  the company's  net  profit  after  zakat  and  tax  going  forward.  We  are  raising  our  dividend payout forecasts from 30% to 35% for both FY12 and FY13, which translate into gross dividend yields of 2.8% and 3.3% respectively.

Source: OSK