FY19 PATAMI of RM364.8m (+24%) and dividend of 20.0 sen declared are within estimates. Though investors could be wary of potential earnings risks as a banca-partnership with RHB Islamic Bank is put on the line, we believe the group should still operate sustainably with its other partners while boasting solid operating ratios with expansion in markets beyond its key credit-related products. Maintain OP but trim our TP to RM6.05 (from RM6.85) on lower PBV valuations.

FY19 within. FY19 PATAMI of RM364.8m is in line with our/consensus expectations, making up 100%/97% of respective estimates. An interim dividend of 20.0 sen was declared in Dec 2019. This is also closely within our anticipated payout of 19.0 sen.

YoY, FY19 operating revenue jumped to RM3.12b (+18%) driven by stronger performance in the Family Takaful business. This likely stemmed from the successful bancassurance partnerships which drove demand for credit-related products amidst a flattish General Takaful. Operationally, performance ratios also improved with lower claims incurred ratio (CIR) at 42.0% (-9.5ppt) and management expense ratio at 12.4% (-0.7ppt). Further supplemented by better numbers from other income (+48%), this translated to a FY19 PATAMI of RM364.8m (+24%).

QoQ, 4QFY19 operating revenue rose by 4%, although this was mainly due to better results from investments as gross premiums saw a slower uptake while the retention ratio during the period was also lower (85.9%, -0.8ppt). Higher CIR of 43.6% (+3.0ppt) was offset by a decrease in management expense ratio at 8.5% (-6.6ppt). However, owing to higher sales-related expenses, 4QFY19 PATAMI fell by 33% to RM75.1m.

Stirred but not deterred. Recently, the group was dampened by the retendering process with one of its banca-partners, RHB Islamic Bank, which would lapse in July 2020 if not renewed. We maintain our view that the hypothetical loss of this agreement may impact the group at only c.5% to bottom-line, as total bancassurance contributions are thought to make up less than 50%, with Bank Rakyat thought to be the largest contributor to the segment. Although earnings growth excitement could be tapering off, we anticipate the group to remain a prominent player in the Takaful industry as a beneficiary of Bank Negara’s agenda to expand the country’s Islamic finance proportion to 40% in 2020. Improvements to its operating ratios could allow the group to remain sustainable while introducing more less-conventional, non-credit related products to grow its market share. Additionally, efforts to promote a digitalised front could allow the group to cater to underserved areas while cutting back on expenses (i.e. commissions, agent fees).

Post-results, we introduce our FY21E earnings.

Maintain OUTPERFORM but with a lower TP of RM6.05 (from RM6.85). We tone down our valuations to 3.5x FY20E PBV (from 4.0x, +1SD above the stock’s 3-year mean). Our lower valuation is premised on softer investment sentiment arising from threats on the loss of banca-partnerships. We believe the stock sell-down could be overdone as it is still compelling for its superior ROE (c.25-30% vs industry 20%) and market leader position Although dividend yield of 4.4% may not be the most tempting, we believe there is little earnings risk for the stock, save for unfavourable developments in its banca-partnerships. In addition, the pending restructuring of Bank Islam could unlock and overhang and introduce fresh liquidity to the stock.

Source: Kenanga Research - 26 Feb 2020