1HFY20 PATAMI came within expectations despite a weak 2QFY20 performance due to the MCO. No change to our FY20E earnings as we are still cautious for 2H 2020 given the protracted weak economy. Call maintained at MARKET PERFORM but with a higher TP to RM5.25 as we roll over our valuation to FY21E.

Within expectations. 1HFY20 PATAMI of RM177m (-0.4% YoY) is in line, making up 55% of both our and market estimates. No dividend declared as the Group normally declares a single dividend payment at year-end.

YoY, 1HFY20 operating revenue fell slightly (-10%) to RM1,429m, underpinned by a weak 2QFY20 revenue falling 43% to RM516m. While Gross Earned Premium (GEP) from General Fund saw a slight dip (-2%) to RM365m, GEP from Family Fund fell 20% to RM772m. Family Fund was affected by the MCO which impacted sales on the Group’s medical products. General Fund was affected by weak performance from the fire class segment. As expected in a slowing economy, net benefits & claims (NBC) fell 11% to RM422m underpinned by Family falling 9% to RM351m attributed to lower death and medical claims. Other income fell 16% to RM218m due to a RM35m in Fair Value losses. Operationally, performance ratios deteriorated with higher claims incurred ratio (CIR) at 46% (+4ppt) – as the fall in premiums outpaced the drop in benefits & claims. The period’s weak performance was mitigated by lower opex (-17% to RM330m) translating to a 1HFY20 PATAMI of RM177m.

QoQ, weak operating revenue was dragged by Family Fund falling 50% to RM334m. Fall in GEP from Family Fund outpaced General at 44% vs 19% to RM276m and RM163m, respectively. Fall in General NBC outpaced Family at 61% vs 37% to RM23m and RM135m, respectively. On a positive note, for the quarter under review, other income saw improved performance of RM182m bolstered by Fair Value gains of RM48m vs the previous quarter loss of RM83m and a resilient investment income of RM95m.

Still cautious for 2H. The Covid-19 pandemic and the associated economic impact are set to continue in 2H 2020 with cautious consumer spending in the coming months. While Family Takaful might slowly recover in 2H 2020 given the RMCO, we do not discount a challenging performance from General Takaful given the protracted weak economy. 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%.

Post-results, as results are in line, we made no changes to our FY20E earnings.

Maintain MARKET PERFORM with a higher TP of RM5.25 (from RM4.85) as we roll over our valuation to 2.81x FY21E PBV (implying an unchanged 1SD below its 5-year mean).

Risks to our call include: (i) lower premium underwritten, (ii) higher than-expected claims incurred, (iii) higher-than-expected management expense ratio, iv) 2nd wave of pandemic, and (iv) protracted weak economy spilling into 2021.

Source: Kenanga Research - 26 Aug 2020