We initiate coverage on TAKAFUL with an OP call and TP of RM4.27. Growing demand for Takaful products, low penetration rates as well as government initiatives augur well for TAKAFUL’s earnings prospect. Meanwhile, its unique proposition as the only operator with 15% no-claim rebate should continue to attract the right customers with good claim experience. Additional plus points are the group’s consistently high ROE delivery in the industry (FY16: 24%) as well as the decent dividend yield of 4%.

A pure listed Takaful operator in Malaysia. Syarikat Takaful Malaysia Berhad (TAKAFUL) is the only pure takaful operator listed in Bursa Malaysia. The group provides two types of Takaful business namely Family and General Takaful business. Note that the growth for the Malaysian Takaful industry has been riding on the growth of the Islamic banking and finance sector; which have seen the industry’s assets growing at 5-year CAGR of 10%, parallel with the Islamic banking system assets 5-year CAGR of 12%. With BIMB Holdings being its major shareholder (at 59.9%), TAKAFUL is well-poised to ride on its growth, which also offers a wide and trusted distribution base.

Strong prospect of Takaful in Malaysia. Takaful total fund assets size have grown with a higher quantum of 5-year CAGR of 10% to RM26.8b in 2016 compared to the conventional insurance’s total fund assets growth of 7%. Meanwhile, Takaful net contribution income has also grown faster at 5- year CAGR of 9% vis-a-vis conventional 5-year CAGR of 6%. Coupled with low penetration rate of 54% as well as growing consumer awareness amid rising medical costs and living expenses, we still see tremendous potential in the takaful business which will continue to support TAKAFUL earnings.

Well poised to benefit from government’s initiatives. The government has initiated a few important initiatives, i.e. Life Insurance and Family Takaful Framework as well as phased liberalisation of general insurance to improve intake of insurance and takaful products and services with the aim to achieve 75% penetration rate by 2020 under the Economic Transformation Programme. Given the group’s biggest market share in industry’s group Family Takaful business (at 25% as of FY16), and having the 4th biggest market share in the combined Life insurance and Family Takaful business, we believe the group is well poised to benefit from such initiatives, which support our estimated 2-year GEP CAGR of 14%.

Unique proposition with 15% no-claim rebate. TAKAFUL offers 15% cash rebate with no claims within the coverage period to all its participants in the General and selected Family Takaful Products. Note that the group is the only Takaful Operator, who also consistently offers no-claim rebate to its customers, thanks to its consistent surplus/profit available in Takaful fund every year supported by strong underwriting fundamental, decent claims alongside strong asset management practices. We perceive it as a unique proposition that attracts the right customers with good claim experience as well as a stabiliser in driving low claims experience; which have seen its net earned premium growing at a 5-year CAGR of 9%. In terms of claims experience, the group’s ratio is well maintained at 53%- 58% from FY11-FY16, vis-à-vis other conventional insurers which are hovering at 40%-63%, thanks to its unique proposition as well as wellbalanced classes of business.

Initiate coverage with an OUTPERFORM call with TP of RM4.27. We value TAKAFUL at its blended FY18E PER/PBV ratio of 16.4x/3.9x (both based on its average 3-year PER and PBV) which we think is reasonable given its consistent double-digit ROE low claims ratio as well as decent dividend yield. Earnings prospects are also decent (with 2-year NP CAGR of 10%) underpinned by growing demand for takaful products, low penetration rates as well as government initiatives. Its unique proposition as the only operator with 15% no-claim rebate should also continue to attract the right customers with good claim experience.

Source: Kenanga Research - 26 Sept 2017