TAKAFUL’s FY21 CNP of RM411m beat our/street’s estimates at 117%/115%, mainly due to a one-off lower- than-expected ETR. However, the 12.0 sen dividend payment missed our expectations. Despite the earnings beat, we trim our FY22E CNP by 10% to account for prosperity tax and tax in Wakalah income (starting YA2022). Our new FY23E CNP implies a 5% growth, from normalization in tax and growth in premiums earned. Maintain OP with lower TP of RM5.35 @ FY22E PBV of 2.2x (previously 2.5x). The lower valuation reflects the lower ROE from said tax changes.

FY21 beat estimates. 4QFY21 core net profit (CNP) of RM157m (+115% QoQ; +51% YoY) brought FY21 CNP to RM411m (+14% YoY). This beat our/consensus estimates at 117%/115%. The deviation was due to: (i) higher-than-expected GEP from General Takaful, (ii) lower-than-expected Claims Ratio, and (iii) lower-than- expected effective tax rate, as STMB was required to provide for deferred tax benefits. 4QFY21 DPS of 12.0 sen brings FY21 DPS to 12.0 sen, below our 18.0 sen estimate.

YoY, gross earned premium (GEP) rose 10% from stronger Family Takaful (+7%) and General Takaful (+16%). However, a higher Combined Ratio weighed at 68.1% (+1.8ppt), and PBT rose by only 3%. However, due to a provision for deferred tax benefits, effective tax fell by 8.8ppt to a mere 6.0%, bringing CNP up by 14%.

QoQ, 4QFY21 GEP rose 25%, driven by higher GEP in Family Fund (+28%) and General Fund (+30%). The spike in GEP is due to: (i) backlog of loans that couldn’t be approved in 3QFY21 due to FMCO, (ii) loans growth in 4QFY21 on the resumption of economic activity, and (iii) resumption of face-to-face activities, which boosted sales. Thanks to the aforementioned provision for deferred tax benefits, CNP jumped 115% to RM157m.

Continued recovery in FY22. Looking ahead, we believe the recovery in banks’ loan growth will continue to fuel growth in its credit-related products. The resumption of face-to-face activities should also drive sales of its other products, as seen in 4QFY21. Meanwhile, its continued digital efforts should allow STMB to reach under-served segments while simplifying its go-to-market strategy. We understand that, currently, management is in discussions with banks for additional bancassurance partnerships (on top of its existing 17 partnerships). Of its 4 key partners – Affin, RHB, BIMB and Bank Rakyat – Affin and Bank Rakyat’s agreements are due to expire in 2023, but STMB expects the partnerships to be extended, due to high switching costs.

Post results, after revising our FY22 ETR to account for: (i) the one-off prosperity tax, and (ii) tax on Wakalah income effective YA 2022, we lower our FY22E CNP by 10%. We introduce FY23E CNP of RM363m, implying a ~5% growth, fuelled by normalization of tax rate (from the prosperity tax) and continued growth in GEP. We reduce FY22E DPS from 20.0 sen to 14.0 sen.

Maintain OP with lower TP of RM of RM5.35 (from RM5.85) @ lower FY22E PBV of 2.2x (previously 2.5x), reflecting -1SD from 5-year mean. The lower valuation is a reflection of decline in ROE from >20% to 17%~18%. Nevertheless, we see value in the stock at its current level. Moreover, there are catalysts such as continued growth in credit- related products, fuelled by Islamic loans growth, and potential new bancassurance partnerships.

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

Source: Kenanga Research - 25 Feb 2022