Although 1QFY20 PATAMI of RM102m came within estimate, operating revenue fell slightly with the outlook likely to be challenging in subsequent quarters. FY20E earnings slashed down on account of subdued economy ahead arising from the Covid-19 impact. TP is lowered to RM4.85 with call reduced to MARKET PERFORM.

In line. 1QFY20 PATAMI of RM101.6m is in line with our/consensus expectations, making up 27%/28% of respective estimates. No dividend declared as expected.

YoY, 1QFY20 operating revenue fell slightly (-0.6%) to RM913m, underpinned by slightly weaker performance from both General (-1.1%) and Family Takaful Business (-1.3%). Lower sales from employee benefits products dragged Family Takaful while General Takaful was dragged by slower performance from the fire and motor classes. Operationally, performance ratios deteriorated with higher claims incurred ratio (CIR) at 45.60% (+3.1ppt) and management expense ratio at 18.5% (+1.1ppt) - dragged further by poor numbers from other income (-72% to RM36m). The quarter’s weak performance was somewhat mitigated by lower opex (-4.3% to RM213.4m) translating to a 1QFY20 PATAMI of RM10.16m (+5.3%).

QoQ, 1QFY20 operating revenue improved by +17%, mainly attributable to higher sales generated from both Family and Takaful Business although this was mainly due to better results from investments (+2% to RM80m) as gross premiums saw a marginal uptake (+0.4%) while the retention ratio during the period was also lower (83.9%, -2ppt). Higher CIR of 45.6% (+2.0ppt) was supplemented by an increase in management expense ratio at 18.5% (+10ppt) with other operating expenses up by +221% to RM84.1m. However, PBT was up by 33% to RM114m due to higher net wakalah fee income arising from business growth in the Family and General Takaful.

Stirred and shaken. The Covid-19 pandemic and the associated economic impact are posing new challenges and uncertainties. Given the adverse impact likely to materialise in the 2nd and 3rd quarters given the extended MCO and cautious consumer spending ahead, operating revenue will likely be a stretch in the coming months. Although earnings growth excitement could be tapering off, we still 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%. 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 slash our FY20E earnings by 16% to RM320m on account of the anticipated adverse economic impact.

Reduced to MARKET PERFORM with a lower TP of RM4.85 (from RM6.05). We tone down our valuation to 2.935x FY20E PBV (from 3.5x, +1SD above the stock’s 3-year mean) – implying 1SD below 5- year mean. Our lower valuation is premised on weak earnings arising from the subdued economy ahead.

Risks to our call include: (i) lower premium underwritten, (ii) higher than-expected claims incurred, and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 19 May 2020