As expected, 3QFY20 saw improved earnings under the RMCO with both the General and Family Fund improving from the preceding quarter. QoQ, higher Opex was seen which we believe was attributed to Takaful improving its digital ecosystem to enhance distribution and brand awareness in this prevailing pandemic. Recent vaccine developments and news on the proposed EPF withdrawals for insurance and takaful products are positive for the sector. Given the recent pullback in share price, we raised our recommendation to OUTPERFORM from MARKET PERFORM with an unchanged TP of RM5.25.

In line, 9MFY20 PATAMI of RM260m accounts for 80%/78% of our/market estimates. No dividend declared as expected.

YoY, not surprisingly, activities were affected by the MCO and RMCO. 9MFY20 operating revenue fell 7% to RM2.2b underpinned by weaker revenue from Family Fund falling by 13% to RM1.52b vs General Fund (+11%) to RM616m. Likewise, Gross Earned Premium (GEP) fell 12% to RM1.82b dragged by Family Fund, falling 17% to RM1.2b as Family Fund was affected by lower sales from credit-related and group medical products as the MCO and RMCO affected business activities. However, General Fund saw improvement by 3%, attributable to healthy business from the motor class segment. Net claims incurred fell 8% to RM670m with both Family and General Fund falling by 7% and 10% respectively due to lower claims from medical (Family) and motor (General). Income from other operations was soft (+1%) dragged by falling investment income (-18%) and Fair Value losses of RM10m. Opex fell 11% mitigating the impact of falling premiums as CNP for the period ended at RM260m (-10%).

QoQ, saw sequential improvement as 3QFY20 CNP ended +9% to RM83m. GEP rebounded (+54%) with uptick coming from Family Fund (+75% to RM484m) and General Fund (+18% to RM191m – on improved contribution from fire, motor and commercial segments) thanks to the less restrictive RMCO. Net claims saw a 59% uptick driven by claims from Family Fund (+48). Other income saw a 17% dip to RM151m underpinned by lower Fair Value (-50%) and Realised Gains (-48%). As highlighted above, opex saw a 52% uptick sequentially.

The prevailing CMCO will likely pose challenges for 4QFY20 but we do not expect sombre earnings as seen previously during the MCO period. As a pioneer and early adopter of online distribution and new digital technologies in supporting distribution channels, we are positive Takaful will be able to mitigate some sales and operational challenges faced in this ongoing pandemic. We believe the Group will continue with its innovative strategies via the implementation of its digital strategy, online solutions and digital ecosystem (as seen from its higher opex in 3Q) to expand its distribution capabilities and brand awareness.

Post-results, we made no changes to our FY20/21E earnings.

Upgrade call to OUTPERFORM with an unchanged TP of RM5.25, which is based on 2.81x FY21E PBV. Recent vaccine developments and the proposed EPF withdrawal for insurance and takaful products under Budget 2021 are positive for the sector and support the rebound in FY21E earnings. Furthermore, the counter offers an attractive dividend yield of >4%. Given the recent pullback in the stock’s price, the stock now offers a potential total return of >10%. Hence, we raised our call to OUTPERFORM from MARKET PERFORM.

Source: Kenanga Research - 25 Nov 2020