Post-meeting, we are assured by TAKAFUL’s near-term outlook. Its market-leading position in the takaful insurance space is complemented by bancassurance tie-ins, with anticipated fruition from other fronts (i.e. employee benefits, motor). While we raise our TP to RM7.15 (from RM6.50) on higher valuations premised on the stock’s defensiveness against the pending fire insurance review, we downgrade it to MP on limited capital upside.

Conducive partnerships. Recall that in 1Q19, TAKAFUL registered a YoY PATAMI growth of 38% to RM96.4m. This was led by new bancassurance partnerships (namely Bank Rakyat) since July 2018 which boosted the group’s credit-related products. Contribution from the segment is expected to sustain, accounting for c.40% of the group’s gross contributions. Further expansion in this segment and other insurance segments could be fuelled by Bank Negara’s directive to increase Malaysia’s Islamic finance mix to 40% by 2020.

Enabling digitalisation. With a growing online distribution presence, the group looks to capture a larger share within the employee benefits market. This could add up to the group’s medical coverage division, which is estimated to make up 20% of contributions, in addition to offering value-added services to prospective employers. Digitalisation could also lead to better accessibility and convenience for its motor insurers which could serve as an incentive to subscribe with TAKAFUL. On the other hand, an increase in adoption of the online platforms could result in lower commission expenses and agent fees, hence a leaner operating landscape. We also opine that digitalisation could extend the group’s footprint towards less assessable markets (i.e. rural, sub-urban areas).

Holding the fort. Still the industry leader within the Takaful space, we believe the group could gain traction from its trusted brand equity in the market. Aside for the above key segments, a larger agency force will facilitate more client-facing offerings (i.e. term-insurances, investmentlinked products), though not expected to contribute significantly to the group. With regards to fire insurance, a pending review is expected to be brought up by Bank Negara during this 2H19 period, which could potentially see a similar track to the liberalise and detariffy the segment. Regardless, we believe it may not impact the TAKAFUL group as significantly as other players given their proportionately lower exposure to the insurance class (accounting for c.10% of gross contributions vs other players at c.40%).

Downgrade to MARKET PERFORM (from OUTPERFORM) but with a higher TP of RM7.15 (from RM6.50, previously). While we leave our earnings estimates unchanged, we upgrade our blended valuations to 16.0x/4.0x FY20E PER/PBV (from 15.0x/3.5x, previously), moving to +1SD from the previously pegged 3-year forward average. We believe that the stock’s limited exposure and risks to the Fire Insurance review could attract attention from investors seeking a defensive position in the insurance space. However, the buying rally of the stock led by its stellar results have diluted its dividend yields to less than 3%, which may keep some investors away with the limited capital upside. Hence our downgrade to Market Perform.

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

Source: Kenanga Research - 17 Jul 2019