6M19 PATAMI of RM177.4m (+47%) is within estimates, driven by wider channels arising from the group’s bancassurance partnerships while efforts to promote other segments are also noted. We believe the stock could be a preferred choice in the insurance space for its defensiveness against development in fire-class insurance. However, dividend yields may not be as attractive as before following share price run-ups. Maintain MP and TP of RM7.15.

6M19 within. 6M19 PATAMI of RM177.4m came in within both our and consensus expectations, accounting for 49% of both full-year estimates. No dividends were declared, as expected. Typically, the group only declares a single dividend payment at the year-end.

YoY, 6M19 operating revenue increased by 24%, mainly propelled by higher Gross Earned Contributions from the Family Takaful business, hugely benefiting from the successes of recent bancassurance partnerships. On the other hand, General Takaful business’s growth of 8% was thanks to more fire-class insurance take-up. Other income nearly doubled from higher fair value gains. Despite the increased topline, cost ratios demonstrated improvements, with claims incurred ratio (CIR) at 41.9% (-14.6ppt) and management expense ratio at 17.4% (- 1.4ppt). Overall, 6M19 PATAMI registered at RM177.4m (+47%).

QoQ, 2Q19 operating revenue fell by 27%, as both Family and General Takaful likely experienced seasonal weakness. During the period, CIR managed to improve to 41.2% (-1.3ppt) while management expense ratios were somewhat stable. In tandem with the softer top-line and higher effective tax at 16.9% (+1.6ppt), 2Q19 PATAMI closed at RM80.9m (-16%).

Still some in the bag. The group could be positioned in a sweet spot by the fruition of a growing customer base from its new partnerships (most notably with Bank Rakyat in 3Q18). These are believed to have further enlarged the demand for the group’s key credit protectionrelated products, which are thought to be of lower risk. With a growing online distribution presence, the group looks to capture a larger share within the employee benefits market. 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 increasing adoption of the online platforms could result in lower commission expenses and agent fees, hence a leaner operating landscape. On the matter of the pending detariffication of fire insurance, we highlight that the TAKAFUL group would not be as impacted 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%).

Post-results, we leave our forecasts unchanged.

Maintain MARKET PERFORM and TP of RM7.15. Our target price is premised on an unchanged blended valuation of 16.0x/4.0x FY20E PER/PBV, which is close to +1SD from the previously pegged 3-year forward average. We believe that the stock’s limited exposure to the fire insurance review could attract attention from investors seeking a defensive position in the insurance space. However, previous buying rallies have diluted its dividend yields to less than 3%, which may keep some investors away with the limited capital upside.

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 - 26 Jul 2019