Targeting >15% gross contributions growth. Management is targeting a minimum gross contribution growth of 15% moving forward. This is expected to be mostly driven by continued strong growth of the family takaful segment, which should still overtake that in the general takaful segment, in line with our view. The family takaful contribution, which has surged by about 60% YTD, currently accounts for about 70% of total gross contributions.

Not expecting significant strain on profits. STMB has ample reserves in its risk funds to sustain its product pricing. In addition, the group expects the stable investment income growth to boost its underwriting performance. We also understand that management will keep a lid on expenses as it believes that there is unlikely to be a drastic hike in commissions and incentives offered to agents as these are capped by Bank Negara Malaysia (BNM) regulations. Therefore, any increase in commissions or agency-related expenses will move in tandem with STMB's gross contributions as well as product mix.

ITCL yet to be determined. Following the implementation of the Risk-Based Capital Framework, press reports recently quoted BNM Governor Tan Sri Dr Zeti Akhtar Aziz as saying that the corresponding framework for the takaful sector has yet to be finalised. We understand that STMB is consistently working with BNM in formulating the necessary Internal Target Capital Level (ITCL), or internal capital adequacy ratio. Regardless of changes in BNM's requirements prior to finalising the framework, we understand that STMB's capitalisation strength is in line with or above the industry average ITCL. That said, we are keeping our dividend payout forecast as we do not foresee any regulatory constraints at this point.

No changes in our forecast. Based on the positive takeaways from the meeting, we maintain a BUY on STMB as well as our RM8.00 FV. We continue to like STMB's unique position in the country's takaful industry and its growth prospects.

No drain on profit anticipated. STMB has ample reserves in its risk funds to sustain its product pricing. STMB also expects stable growth in its investment income to complement its underwriting results. We understand that it will keep a lid on expenses and does not expect any substantial hike in expenses relating to commissions and incentives offered to agents as these are being capped by Bank Negara Malaysia (BNM). This means that any increase in such expenses will move in tandem with the quantum of gross contributions as well as product mix. Barring unforeseen circumstances, management expects the group's expenses to go up by 10% every year, mostly due to recurring expenses such as personnel-related costs and IT depreciation/amortisation costs, among others. This estimate is below our already conservative forecast.

Seeking more bancatakaful tie-ups. We understand that the slight drop in 3Q contributions q-o-q (-5.5%) was partly attributed to the slowdown in sales from a few bancatakaful partners, versus a more than 50% jump in bancatakaful contributions in 1HFY12 alone. We understand that Bank Islam has been aggressively driving sales of loans/financing packages recently, which should help bolster STMB's mortgage reducing term takaful (MRTT) and credit wakalah products. Meanwhile, the group is also on the lookout for more partners to reduce its reliance on bancatakaful by raising the contribution from corporate agents, who currently make up 20% to 25% of gross contributions.

Corporate agents to propel non-motor general takaful. STMB will continue to focus on clinching the top position in the non-motor general takaful segment. This will be driven by contributions from corporate agents, as we believe that deriving synergy from cross-selling general takaful products via the current bancatakaful distribution channels can be challenging. The group aims to increase the number of corporate agents to 2,000 and retail agents to 1,500 by FY13 from 1,200 and 900 respectively. Currently, motor insurance makes up approximately 45% of total general takaful contributions, while fire and personal accident (PA) contribute about 36%.

Aiming to perk up investment yields. Depending on market conditions, STMB will seize any opportunities to enhance its exposure to higher-yielding assets, namely the equity classes, government bonds and corporate sukuks, as well as properties. It is keeping a close eye on market volatility and will stay prudent in its investments and asset allocation strategy. Therefore, its priority is to mitigate any risks stemming from potentially adverse external factors which could sap investment yield.

Not subject to seasonal changes. Management has reiterated that seasonality does not in any way influence the takaful business. However, the group's 1Q and 4Q performance are historically stronger due to the higher incidence of insurance renewals.

Source: OSK