FY18 core PATAMI of RM278.2m (+35%) came above estimates thanks to stronger premium contributions and underlying ratios. However, we deem the dividend payments as a miss. Prospect is expected to be driven by growing demand for takaful products, aided by the group’s strong market presence and solid products. Maintain OP with a higher TP of RM5.25 (from RM4.85) as we adjust for stronger top-line and operating ratio expectations.

FY18 above. FY18 core PATAMI of RM278.2m is above our and consensus expectations, making up 111% of both full-year estimates. The positive deviation was due to: (i) higher-than-expected premium growth, (ii) lower-than-expected claims incurred ratio, and (iii) lower-thanexpected management expense ratio. An interim dividend of 15.0 sen was declared in December 2018. However, this was below our anticipated 17.0 sen for FY18 as we expected a payout of c.50% of profit (i.e. closely within the group’s three-year historical average).

YoY, 12M18 operating revenue expanded by 23% on the back of stronger Gross Earned Contributions (GEC) in both Family and General Takaful. Family Takaful grew by 27% from the encouraging reception of its credit protection-related and possibly medical products. The General Takaful segment’s revenue also rose, by 24% from the greater uptake in fire and motor class insurances. Although total other income diminished by 20% owing to greater fair value losses, improvements from the claims incurred ratio (CIR) at 51.5% (-1.9ppt) and management expense ratio of 18.3% (-1.5ppt) led to a growth in PBT to RM337.0m (+33%) and margin of 12.8% (+0.9ppt). Core PATAMI increased to RM278.2m (+35%) from lower effective taxes at 12.9% (-5.8ppt) and after adjusting for tax recoverables of RM16.7m.

QoQ, 4Q18 operating revenue grew by 8% with a declining General Takaful segment being offset by better results in Family Takaful. Aided by a healthier CIR of 46.6% (-1.7ppt) and management expense ratio of 16.9% (-0.9ppt), 4Q18 PATAMI improved similarly at 8% despite a higher effective tax rate of 12.0% (+6.6ppt).

Stellar momentum. Takaful products continue to command strong demand against conventional insurance offerings, backed by national efforts to increase the country’s Islamic banking proportion. Additionally, we anticipate a growing adoption in medical insurance from the prevalent concerns of rising medical costs. Continuing with their emphasis to cater to the middle-and-upper-income population bracket, the group looks to expand its agency force and online distribution channels to enhance cost efficiency. In spite of the additional initiatives, the improving CIR indicates that the group continues to have solid credit controls. We believe that further establishing a strong front could allow the group to have a reasonable footing against other players in the industry ahead of the liberalisation review of fire insurance classes in 2019.

Post-results, we raise our FY19E earnings by 10.5%, mainly in consideration of better sales in both Family and General Takaful businesses and operating ratios (namely management expense, CIR and reinsurance ratios). Additionally, we introduce our FY20E numbers.

Maintain OUTPERFORM with a higher TP of RM5.25 (from RM4.85, previously). Our valuation is based on a higher FY19E EPS of 34.4 sen and BVPS of RM1.37 from the resulting adjustments, against an unchanged blended 15.0x/3.9x PER/PBV valuation (within the stock’s 3- year average). The stock commands a superior FY19E ROE of 30% against an industry average of c.20%. Furthermore, higher dividend yields of c.4.5% against the industry average of 3.5% could make the stock a more attractive pick against other insurance players in the market.

Source: Kenanga Research - 25 Jan 2019