1Q19 PATAMI of RM96.4m (+38%) beat estimates, on stronger sales numbers, likely led by new bancassurance partnerships. The group could continue to see traction given the early days of these partnerships. At the meantime, efforts to expand its digital channels and venture into other new insurance spaces could translate favourably in the medium term. Maintain OP with a higher TP of RM6.50 (from RM6.05) on more optimistic revenue forecasts.

1Q19 above. 1Q19 PATAMI of RM96.4m is above our and consensus expectations, making up 30% of both full-year estimates. The positive deviation is likely due to higher-than-expected credit protection-related products take-up from better bancassurance business. No dividends were declared, as expected. Typically, the group only declares a single dividend payment at the year-end.

YoY, 3M18 operating revenue grew by 23% from stronger Gross Earned Contributions (GEC) mainly from the Family Takaful business, which enlarged 55% on the back of new bancassurance partnerships driving demand for credit-related products. The General Takaful business also grew (+12%) with the rise in fire-class insurance take-up. Other income items also grew by 36%, mostly from higher fair value gains. Despite the increased top-line, cost ratios demonstrated improvements, with claims incurred ratios (CIR) at 42.5% (-18.7ppt) and management expense ratios at 17.4% (-1.5ppt). Overall, this translated to a PATAMI growth of 38% to RM96.4m.

QoQ, 1Q19 operating revenue rose by 31%, similarly thanks to better premiums and other income items, likely driven by bancassurance partnerships. However, despite the period’s CIR being reduced by 3.9ppt, the greater management expense ratio (+0.6ppt) and higher effective taxes at 15.3% (+3.3ppt), 1Q19 PATAMI only registered a 7% growth.

Hands at the right place. From an earlier analysts’ briefing, management had mentioned that establishing the company as the preferred insurance partners for several major Islamic banking institutions could open opportunities for cross selling its products. It was previously guided that the new partnerships commenced in 4Q18. We believe that this was the main contributor to the rise in the Family Takaful’s credit protection-related products, which is already the lion’s share of all the group’s products. With Bank Negara’s target of increasing the country’s Islamic finance mix to 40% by 2020 (2018 estimated at 32%), this could translate to more transactions with the above Islamic banking institutions. While the group has also holds initiatives to expand its digital outreach and product base (i.e. employee coverages), we believe that it could only demonstrate sizeable growth in the medium-term as their bases are still small. At the meantime, the group may reap fruits from its bancassurance partners. Though it appears that credit-related products are the immediate beneficiaries from this, we do not discount the possibility of other insurance classes also seeing similar traction as the cross-selling could encompass multiple products.

Post-results, we raise our FY19E/FY20E earnings by 14.4%/9.0% to incorporate more optimistic growth in both Family and General Takaful.

Maintain OUTPERFORM with a higher TP of RM6.50 (from RM6.05, previously). Our valuation is based on a higher FY20E EPS of 46.4 sen and BVPS of RM1.71 from the resulting adjustments, against an unchanged blended 15.0x/3.5x PER/PBV valuation, which is in-line with their respective 3-year Fwd. averages. The stock continues to command superior ROE of c.30% against the industry average of c.20%. Additionally, the stock appears to be facing fewer headwinds as compared to other insurance players due to their well-diversified product mix and strong direction of the nation’s Islamic banking landscape.

Source: Kenanga Research - 26 Apr 2019