9M17 NP came in within expectations, so was the absence of dividend. We maintain our FY18E/FY19E earnings. We like TAKAFUL for its decent earnings prospects driven by resilient demand for Takaful products as well as favourable government’s initiatives. Its unique proposition with 15% no- claim rebate should continue to attract the right customers with good claim experience. Consistently high ROE delivery in the industry (FY17E: 24%) is also another plus point. Maintain OP with an unchanged TP of RM4.27.

Within expectations. The group reported 3QFY17 NP of RM48.6m (+8% QoQ; +8% YoY), bringing 9M17 CNP to RM150.4m (+10%) which made up 77%/76% of both our/consensus full-year forecasts. As expected, no dividend was declared under the quarter reviewed. We are expecting the group to declare a total net DPS of 13.4 sen for FY17E which implies a pay-out ratio of 56%.

YoY, 9M17 operating revenue grew by 7% with higher sales generated from higher Gross Earned Contributions (GEC) in both Family Takaful and General Takaful businesses. For the lion’s share contributor, Family Takaful, which contributed 70% of the group’s GEC, it grew by 5% underpinned by higher sales from its mortgage related products. Meanwhile, General Takaful recorded decent growth of 9% on higher sales of fire and motor classes. While the group recorded lower Net Earned Contributions (NEC) growth of 4% (as opposed to GEC of +7%) on lower retention ratio of 84.4% (-1.8ppts, due to higher contributions ceded to retakaful), PBT in fact improved by 10%. This was mainly due to the group’s good claims experience which have seen an improved claims incurred ratio of 55.5% (-6.3ppts).

Meanwhile on QoQ basis, while operating revenue decreased by 2% on lower sales generated from Family Takaful business (GECP -5%, on lower sales from group medical products), PBT actually improved by 12% on better claims incurred ratio of 51.2% (-5.2ppts) as well as lower management expense of 17.7% (-1.6ppts).

Decent industry and company prospects. We continue to believe that the growth momentum of Takaful industry premium should outpace the conventional insurance given its low penetration as well as resilient demand for Takaful products. Meanwhile, to defend its turf which is the 4th biggest in market share in the combined Life insurance and Family Takaful business, the group’s main focus remained on strengthening its foothold from the perspective of customer reach, operational agility, cost competitiveness as well as maximising its shareholders value. Note that the group has also been amplifying its presence through various marketing activities (including online initiatives) as well as promoting its unique proposition with 15% no-claim rebate; with the latter to attract the right customers with good claim experience. We expect TAKAFUL to register 2-year NP CAGR of 10% to be driven by decent GEC growth (2-year CAGR of 14%) alongside of stable claims incurred ratio (FY17E/FY18E: 56%-57%).

Maintain OUTPERFORM call with TP of RM4.27. We make no changes to our valuation; with an unchanged blended FY18E PER/PBV ratio of 16.4x/3.9x (both based on its average 3-year PER and PBV).

Risks to our call include: (i) lower premium underwritten, hence growth, and (ii) higher-than-expected claims incurred as well as management expense ratio.

Source: Kenanga Research - 23 Oct 2017