1Q18 NP came in above expectations on higher-than-expected net Wakalah fee income from robust growth in its General Takaful business. Absence of DPS was as expected. 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. Consistent high ROE delivery (FY18E: 25%) is also another plus point. Maintain OP with a higher TP of RM4.40. Above expectations. The group reported 1Q18 NP of RM70.0m (+24% QoQ; +23% YoY) which made up 31%/32% of our/consensus full-year forecasts. The positive deviations were due to higher-than- expected Wakalah fee income with robust growth in General Takaful business. Meanwhile, absence of DPS was as expected.

YoY, 1Q18 operating revenue grew by 13% with stronger sales generated by higher Gross Earned Contributions (GEC) in General Takaful. For the lion’s share contributor- Family Takaful which contributed 64% of the group’s GEC, it was almost at par with 1Q17 performance. Meanwhile, General Takaful recorded strong growth of 27% on higher sales of fire and motor classes. While the group recorded marginally narrower Net Earned Contributions (NEC) growth of 7% on lower retention ratio of 83.7% (-0.8ppts, due to higher contributions ceded to retakaful), PBT, in fact, improved by 17%. This was mainly due to higher net Wakalah fee income (+20%) arising from its robust business growth in the General Takaful business.

Meanwhile on QoQ basis, operating revenue improved by 44% on stronger seasonality with higher sales from both Family Takaful and General Takaful business. While PBT increased by 52% on higher net Wakalah fee income (+46%), NP recorded a narrower growth of 24% on a higher effective tax rate of 17.7% (vs. 0.4% in 4Q17).

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 value to shareholders. 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 9%, driven by decent GEC growth (2-year CAGR of 13%) alongside stable claims incurred ratio (FY18E/FY19E: 52%-53%). We also continue to expect decent delivery of ROE (of 25%) in FY18, being the highest in the industry (vis-a-vis average insurance and finance industry’s low teens of 10-11%) with decent earnings in place.

Maintain OUTPERFORM call with higher TP of RM4.40 (RM4.30). Post model updates, our FY18E/FY19E NP have been tweaked by 4% each to account for higher growth from General Takaful business. All in, the TP is increased to RM4.40. This is still based on an unchanged blended FY18E PER/PBV ratio of 16.4x/3.9x (both based on average 3-year PER and PBV).

Source: Kenanga Research - 25 Apr 2018