9M18 PATAMI of RM204.4m (+36%) was above estimates on better underlying operational ratios. The absence of dividends was as expected. The group’s prospects are helmed by its strong market presence with active initiatives and unique propositions, which could continue to capture a bigger share of the market. Maintain OP with a higher TP of RM4.85 (from RM4.75) as we raise earnings to account for more favourable operational ratios.

9M18 above. 9M18 PATAMI of RM204.4m was above our/consensus full-year estimates, making up 87%/90% of respective expectations. The positive deviations were due to (i) higher-than-expected retention ratio, (ii) lower-than-expected management expense ratio as well as (iii) lower than expected ETR (which was due to tax recoverable amounted to RM16.7m on additional tax paid for penalty by IRB). Even after netting off the tax recoverable, the results still made up 81%/82% of our/consensus numbers, reflecting better retention and cost control from management. No dividends were declared, as expected.

YoY, 9M18 operating revenue grew 20% 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 68% of the group’s GEC, grew 17% 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 14% on lower realised gains and higher fair value losses, the impact was offset by better claims incurred ratio (CIR) at 53.4% (-2.1ppts) and a lower management expense ratio of 18.4% (-0.5ppts), resulting in a relatively stable PBT margin of 12.1% (-0.1ppts) with PBT growing at 19%. With lower taxation of 13.2% thanks to the tax recoverable, NP improved by 36%.

QoQ, 3Q18 operating revenue grew 20% on stronger seasonality with higher sales from both Family Takaful and General Takaful businesses. Coupled with lower CIR of 48.3% (-3.7ppts), stronger other income of RM124.1m (from RM35.1m) as well as lower effective tax rate (ETR), NP margin improved to 12.9% (+3.6ppt), resulting in a stronger 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.

Post-results, we raise our FY18E/FY19E earnings by 8%/4% after adjusting for more favourable ratios (i.e. better retention ratio, lower management expenses).

Maintain OUTPERFORM with a higher TP of RM4.85 (from RM4.75, previously). Our valuation is based on a higher FY19E EPS of 31.1sen and BVPS of RM1.28 from the resulting adjustments. At the same time, we adjust our blended FY19E PER/PBV ratio to 15.0x/3.9x (from 15.8x/3.9x) as we re-look at their respective 3-year forward averages.

Risks to our call include: (i) lower premium underwritten; (ii) higherthan-expected claims incurred; and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 26 Oct 2018