Post-meeting, we are assured by TAKAFUL’s near-term outlook. While top-line growth could be less exciting as banca-partnership yields plateau, its efficient operating setup should keep bottom-line expansion healthy. Its strong balance sheet remains one of the leading merits of the group. Upgrade to OP (from MP) but with a lower TP of RM6.85 (from RM7.15) as we move to a PBV only valuation from a blended PER/PBV methodology previously.

Yields from bancassurance still bearing but could be less fruitful.

Since July 2018, thanks to its bancassurance tie-ins (namely Bank Rakyat), TAKAFUL has been registering a solid growth trajectory, especially from its credit-related single-premium products. Going forward, the segment is likely to remain the biggest contributor (est. 50%) to top-line, having led the 32% YoY growth in net earned premiums (NEP). However, we anticipate NEP expansions going forward to be more peckish as the group’s business fully moves to higher sequentially base levels. That being said, the group should remain a beneficiary of Bank Negara’s directive for a greater Islamic finance mix locally of 40% by 2020.

Sustainability is key. From its recent 1H19 results, the group posted healthier claims incurred ratio at 41.9% (-14.6ppt) and management expense ratio at 9.2% (-0.1ppt). Having built a strong top-line base, we believe the group could put emphasis on its already stellar operating ratios to further boost sustainability. This extends to the group’s efforts to streamline its medical/employee benefits segments. Digitalisation persists as a key driver in keeping costs lean, by enabling a lower commission channel of sales while also being a more assessable platform to cater to new and existing customers.

Rooted deeply. As a leader within the takaful insurance space, we expect the group to stand resilient against potential headwinds in the industry. Though Bank Negara’s fire class review looks to have been given another year, we believe it should not impact the group detrimentally thanks to its well-diversified mix in general insurance products. Additionally, recent entrants are not expected to pose any threat to the group with its long established industry presence with synergistic partnerships to boot. We also opine that the group’s buoyant operating numbers could give it plenty of room should there be a need to ramp up its competitive gear.

Post-meeting, we leave our FY19E/FY20E numbers unchanged.

Upgrade to OUTPERFORM (from MARKET PERFORM) but with a lower TP of RM6.85 (from RM7.15, previously). We adjust our target price as we move to a 4.0x FY20E PBV from a blended 16.0x/4.0x FY20E PER/PBV (in line with the stock’s +1SD over its 3-year mean). We believe investors could be less re-active to earnings growth owing to the slowing traction but would continue to bank on the stock for its solid book. TAKAFUL commands a superior ROE of c.30% (vs industry average of 20%) while continuing to be a leader in the takaful insurance space.

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 - 1 Oct 2019