RHB Islamic will discontinue its bancatakaful service agreement with TAKAFUL after its 5-year term expires on 31 Jul 2020. While we are negative on the news, we anticipate limited impact to long-term prospects as banca contributions are thought to be held by other partners (mainly Bank Rakyat). We maintain our OP call and TP of RM6.85 on TAKAFUL for its sustainable projections and superior books against peers.

RHB Islamic looking elsewhere. Yesterday, RHB Islamic Bank (RHB) announced that it will be discontinuing its Bancatakaful Service Agreement with TAKAFUL after its five-year anniversary on 31 Jul 2020. To recap, the service agreement was entered on 26 Aug 2015 which gave TAKAFUL exclusivity to distribute family and general takaful products with RHB.

We are negative on the news, but not overly concerned. Though the termination was not expected as the service agreement was previously stamped to be 10 years (albeit at a 5-year plus 5-year renewal clause), we do not anticipate material impact from this development as we estimate that TAKAFUL’s total bancassurance channels make up less than 50% of the group’s gross contributions. The heavyweight contributor is thought to be Bank Rakyat (signed in Jul 2018) which is largely attributed to the 26% 9M-YTD growth (other major banca partnerships are with Bank Islam and Affin Bank). Furthermore, the service agreement would still provide seven months of contribution in FY20. We are not expecting similar discontinuation cases to occur in the near future. With regards to potential partners for RHB, possible contenders could be the likes of other Takaful product players such as Etiqa and Zurich.

Still hopeful with a hint of caution. Overall, we are still bullish on TAKAFUL’s long-term sustainability. Putting banca channels aside, the group rides on its strong agency force with digitalised platforms boosting direct sales to customers. Its remaining bancassurance partnerships are still expected to remain productive but may not see similar growth tractions as in 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 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.

Post-update, we leave our FY19E/FY20E numbers unchanged for now, anticipating minimal downside impact towards near-term performance.

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 a well-diversified portfolio which we believe shelters them from regulatory risks, warranting premium valuations against its peers (2-3x average). As such, we believe any downward price movements could present a buying opportunity for the stock. Subsequently, the reorganisation of Bank Islam and distribution of TAKAFUL shares could unlock an overhang and introduce fresh liquidity to the stock. 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.

Source: Kenanga Research - 16 Jan 2020