9MFY19 PATAMI of RM289.7m (+42%) is within estimates, with results being driven by the success of its bancassurance partnerships. While we anticipate earnings growth to ease going forward, continuous operational improvements could keep profitability buoyant. Maintain OP and TP of RM6.85.

9MFY19 within. 9MFY19 PATAMI of RM289.7m made up 79% and 80% of both our and consensus respective full-year estimates. We deem the results to be within expectations in anticipation of a slightly softer 4QFY period. No dividends were declared, as expected. Typically, the group only declares a single dividend payment at the year-end.

YoY, 9MFY19 operating revenue rose by 21% as the group’s Family Takaful business saw a surge in earned contributions likely thanks to bancassurance partnerships boosting credit-related products amidst a flattish General Takaful. Overall, performance ratios were better, with claims incurred ratio (CIR) at 41.4% (-12.0ppt) and management expense ratio at 16.6% (-1.8ppt). Growth in other income (+44%) also help result in the stronger 9MFY19 PATAMI of RM289.7m (+42%).

QoQ, 3QFY19 operating revenue recovered by 12% following the previous seasonal weakness in both Family and General Takaful in 2QFY19. Despite the higher volume, CIR improved at 40.6% (-0.6ppt) in addition to management expense ratios coming at 15.1% (-2.4ppt). This translated to a 3QFY19 PATAMI of RM112.3m (+39%).

Moving to a marathon from a sprint. It has been over a year since the group has entered into its highly productive bancassurance partnership with Bank Rakyat. With that, we believe that growth traction in the coming periods may not see significant as the earlier reported quarters. That being said, the continuous agenda by Bank Negara to extend the country’s Islamic finance proportion to 40% by 2020 should still be favourable to the Takaful industry. Additionally, management’s own efforts are in place to build a leaner and more sustainable operating environment in the long term, as reflected by its recent performance ratios. This could also be on the back of a more digitalised front which could not only trim on commission expenses and agent fees, but also improves the accessibility of its products and for greater convenience to its customers.

Post-results, we leave our forecasts unchanged.

Maintain OUTPERFORM and TP of RM6.85. Our target price is based on an unchanged 4.0x FY20E PBV (close to the stock’s +1SD over 3- year mean). TAKAFUL operates in with a well-diversified portfolio which we believe shelters them from regulatory risks, warranting premium valuations against its peers (2-3x average). The group also 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 - 25 Oct 2019