1H18 results came in line, so was the absence of DPS. No change to our earnings estimates. We continue to 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: 25%) is also another plus point. Maintain OP with a higher rollover TP of RM4.75. Within expectations. The group reported 2Q18 NP of RM50.4m (-28% QoQ; +12% YoY), bringing 1H18 NP to RM120.4m which made up 52%/54% of our/consensus full-year forecasts. Meanwhile, absence of DPS was also expected.

YoY, 1H18 operating revenue grew 13% with stronger sales generated by decent Gross Earned Contributions (GEC) in both Family and General Takaful. The lion’s share contributor - Family Takaful which contributed 66% of the group’s GEC, grew 5% on the back of higher sales from credit protection-related products. Meanwhile, General Takaful recorded a much stronger growth of 26% on higher sales of fire and motor classes. Margin-wise, while other income plunged 34% on lower realised gains and higher fair value losses, the impact was offset by better claims incurred ratio (CIR) at 56.5% (-1.1ppts) and lower management expense ratio of 25.3% (-0.7ppts), resulting in a stable PBT margin of 11.4% (-0.1ppts) with PBT growing at 11%. With lower ETR of 17.9%, NP improved by 18%.

Meanwhile on QoQ basis, 2Q18 operating revenue decreased by 27% on weaker seasonality with lower sales from both Family Takaful and General Takaful businesses. Despite lower operational efficiency and thus a higher management expense ratio of 18.3% (+2.7ppts), NP margin remained stable at 9.3% (-0.1ppt) on a better CIR of 52.0% (- 9.2ppt), resulting in a similar quantum of drop (-28%) at its bottom-line.

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, which is 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 a higher rollover TP of RM4.75 (from RM4.40). While we made no changes to our earnings estimates we raised our TP to RM4.75 based on a rollover blended FY19E PER/PBV ratio of 15.8x/3.9x (both based on average 3-year PER and PBV).

Source: Kenanga Research - 30 Jul 2018