TAKAFUL’s 1QFY22 CNP of RM86.8m (-14%) is within expectations. Higher earned premiums are expected in all fronts, but higher claims too should follow suit. In anticipation of the adoption of MFRS 17, the impact of lower retained earnings and profits post-adjustments could lower our FY23E BVPS of RM2.71 to RM1.94. Rolling forward our valuation base year, this lowers our TP to RM4.25 (from RM5.35) with unchanged parameters, indicating possible buying opportunities amidst current weakness. Maintain OP.

1QFY22 within expectations. 1QFY22 came in as expected, making up 25%/24% of our/consensus full-year earnings estimates. No dividend was declared as expected.

YoY, 1QFY22 operating revenue rose 9% thanks to generally better net contributions by both Family Takaful (mainly credit-related products) and General Takaful businesses. We believe the growth was a timely beneficiary of the gradual economic recovery. Notably, net claims surged by 48% (claims incurred ratio: 55.4%, +13.3 ppt) coinciding with the increase in movement and incidences. Additionally, losses in fair value (equities) led to decline in other operating income (-23%). Alongside higher effective taxes (likely to creep up to estimated 32% from prosperity tax), 1QFY22 PATAMI closed at RM86.8m (-14%).

QoQ, 1QFY22 operating revenue expanded by 14% but this was due to higher claims ceded to retakaful with net earned contributions diminishing comparatively (-4%). Similar to the above, claims incurred ratio also saw a meaningful increase (+16.3ppt) sequentially. With tax gains registered in the previous quarter, 1QFY22 PATAMI registered a drop of 44%.

Growth in premiums offset by claims. The group’s recovery in earned premiums is reflective of an industry-wide recuperation, previously underpinned by tight movement controls. The resumption in activity should allow for more aggressive physical sales channels to make up for lost ground. This is elevated by the group’s leading position within bancassurance offerings (estimated at 30% market share). This aside, TAKAFUL has developed its own digital sales platform and digital agents to appeal to a broad scope of customers and provide greater convenience. On the flipside, increased economic activities and movements should translate to a normalisation in the rate of incidences. Understandably, this would be reflective in higher claims and spell double damage to earnings together with a softer trading climate.

Post results, we leave our FY22E earnings unchanged. While we also leave our FY23E numbers unchanged for now, we stay wary of MFRS 17 in FY23. In line with the updates from MFRS 4 to MFRS 17 in 2023, management expects varying impact to its earnings and books. Notably, following reclassifications in fee recognition and cashflows, accounting impact post-MFRS 17 include: (i) retained earnings coming off by 30-45%; and (ii) CNP declining by 15-20%. Following these shifts, ROE is expected to trail close to 25% (from 18%).

Maintain OUTPERFORM with an updated TP of RM4.25 (from RM5.35). While we maintain our applied 2.2x PBV (0.5SD below mean), we propose pairing against a hypothetical FY23E BVPS of RM1.94 which captures the factors of -30% to retained earnings and -15% to EPS in FY23E.

The stock could have been sold down due to scepticism of the new accounting standards and possible earnings weakness arising from higher claims. We believe this presents a buying opportunity as the current adjustments above illustrate that its merits could have been underpriced. Additionally, valuation levels still linger below pre-Covid levels (3-4x PBV) which could suggest strong re-rating gains should sentiment revert as well.

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 - 12 May 2022