FY17 NP came in above expectations on higher investment income and lower-than-expected claims incurred ratio. Net DPS of 15.0 sen is also above mark. We like TAKAFUL for its decent earnings prospects, driven by resilient demand for Takaful products. Its unique proposition with 15% no-claim rebate should continue to attract the right customers with good claim experience. Consistently high ROE delivery (FY18E: 23%) is also another plus point. Maintain OP with a higher TP of RM4.30.

Above expectations. The group reported 4Q17 NP of RM56.3m (+16% QoQ; +43% YoY), bringing FY17 CNP to RM206.7m (+17%) which beat both our/consensus full-year forecasts by 5%. The positive deviations were due to (i) higher-than-expected investment income as well as (ii) better claims incurred ratio on decrease in medical claims in the Family Takaful segment. As a result, higher payout with net DPS of 15.0 sen (vs. our FY17E DPS of 12.0 sen) was declared on 18th December 2017 and paid on 19th January 2018.

YoY, FY17 operating revenue grew by 6% with stronger sales generated by higher Gross Earned Contributions (GEC) in both Family Takaful and General Takaful. For the lion’s share contributor- Family Takaful which contributed 70% of the group’s GEC, it grew by 3% underpinned by higher sales from its mortgage-related related products. Meanwhile, General Takaful recorded strong growth of 11% on higher sales of fire and motor classes. While the group recorded narrower Net Earned Contributions (NEC) a lower h of 2% on lower retention ratio of 83.6% (-2.4ppts, due to higher contributions ceded to retakaful), PBT in fact improved by 15%. This was mainly due to the group’s good claims experience which have seen an improved claims incurred ratio of 53.4% (-8.4ppts; with decrease in medical claims that drove better experience in the major contributor Family Takaful).

Meanwhile on QoQ basis, operating revenue improved by 9% on stronger seasonality. While PBT decreased by 15% on higher management expenses (+3.8ppts to 21.5% which is typically highest in 4Q), bottom-lina lower el was helped by lower effective tax rate of 0.4% (vs. 26.7% in 3Q17).

Resilient earnings prospect with high ROE delivery. 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 as the 4th biggest market player in the combined Life insurance and Family Takaful business, the group’s main focus remains 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. All in, we expect TAKAFUL to register 2-year NP CAGR of 7%, driven by decent GEC growth (2-year CAGR of 10%) alongside stable claims incurred ratio (FY18E/FY19E: 52%-53%). We also continue to expect decent delivery of ROE (of 23%) in FY18, being the highest in the industry (vis-a-vis average insurance and finance industry’s low teen of 10-11%) with decent earnings in place.

Maintain OUTPERFORM call with higher TP of RM4.30 (from RM4.27). Post model updates, our FY18E NP has been tweaked by 5% for house keeping purposes. Meanwhile, we also introduce our FY19E NP of RM235.9m (+6%). All in, our TP is increased to RM4.30. This is still based on an unchanged blended FY18E PER/PBV ratio of 16.4x/3.9x (both based on its average 3-year PER and PBV).

Source: Kenanga Research - 26 Jan 2018