We came away from a recent meeting with management feeling re-assured of its medium-term prospects. Although a near-term outlook seems clouded by industry-wide competition and the upcoming 2019 tariff review, the group’s leading market position coupled by expanding distribution channels and digital initiatives could sustain its performance. The group also benefits from the strengthening local Islamic banking industry. Maintain OP with a TP of RM4.85.

Well-rooted bases. In the recent 9M18, TAKAFUL’s gross earned contributions (GEC) increased by 20% in both Family and General Takaful segments. Management attributes this to the gains in market share driven by a solid and growing bancassurance reach, as well as better reception for the group’s motor insurance products and Family Takaful offerings (i.e. credit-related, medical). Continuous efforts will be in place to enlarge the group’s bancassurance base, but growth from this could see pressures from the growing competition amongst other insurers who are also spreading their exposure against the detariffication-grieved motor class insurance.

For a slice of the pie. To recap, fire insurance classes are due for a review by Bank Negara, to be liberalised in 2019. This is intended to allow fire insurances to be offered at more affordable rates but at the expense of insurers, of which this class is also known to be more profitable against others. To keep up with the intensifying landscape, the group looks towards its strong agency force in sustaining its fire insurances and motor insurance profiles. Capitalising on its leading position and resources, the group aims to provide greater differentiation in products and services provided, such as employee-based coverages and investment-linked products. On other fronts, the group strives to expand its online distribution channels, which could enable better cost efficiency. This should also support the group’s principal credit-related business, which has been attributed as one of the key growth drivers.

Still relevant in the long haul. We believe the group is poised to benefit from macroeconomic developments, such as increasing medical costs to pressurise early insurance subscription and national efforts to improve the Islamic banking share could translate into higher adoption for takaful products. No heads turned from 2019 Budget. In the 2019 Budget announcement on 2nd November 2018, the government described initiatives to increase the adoption of insurance and takaful protection especially among the B40 segment of the population. It is mentioned that insurance peer, Great Eastern, has undertaken to provide a RM2.0b seed funding in realising this exercise. We believe this could give the insurer a head-start in providing coverage towards this segment. Still, we do not believe that this would shrink TAKAFUL’s potential market share as the group is not active in this segment. The group widely caters to the middle income and above population bracket where operating margins are more sustainable.

Post-meeting, we leave our FY18-19E earnings unchanged.

Maintain OUTPERFORM and TP of RM4.85. Our valuation is based on an unchanged FY19E EPS of 31.1 sen and BVPS of RM1.28 from the resulting adjustments. Our blended FY19E PER/PBV ratio is at 15.0x/3.9x which is pegged against their respective 3-year forward averages. The stock’s commands a superior FY18E ROE 30% against an industry average of c.20%. Further, better dividends yields of c.4.5% against the industry average 3.5% could make the stock an attractive pick against other insurance players in the market.

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 - 7 Nov 2018