We recalibrate our applied PBV valuation to 2.5x (@30% discount from hypothetical post-MFRS17 valuations of industry leader). We also increase the stress bearing of our hypothetical MFRS17 impact to TAKAFUL, lowering our FY23E BVPS to RM1.56 (from RM1.94). All in, we arrive at a new target price of RM3.90 (from RM4.25) but maintain our OP call as current sell-down seems unjustified. We feature TAKAFUL as a preferred Shariah pick.

We came away from TAKAFUL’s Analyst and Fund Managers Briefing feeling positive with the presented business plans going forward. Key takeaways are as follows:

- Maintaining its leading Bancatakaful position. The group is thought to be the leader in Bancatakaful with an estimated 36% market share and 17 bank partners in tow. The group is confident of retaining its position fuelled by value-adds to their partners’ wealth management portfolio with credit- related propositions (which we see is TAKAFUL’s key strength). As of FY21, 61% of the group’s Family Takaful contribution originated from banca channels (vs FY20: 53%).

- Boosting share in Employee Benefits (EB) space. EB has always been seen to be highly competitive by the nature of its annual renewals. Incorporating more robust digital solutions paired with wellness and lifestyle programs could elevate the group’s branding and competitive edge in this space. Tie-ins with its existing banca partnerships would also provide strong leverage.

- Digitalisation will likely take precedence in accelerating retail and recurring contribution businesses. The group is cognizant of the higher scalability of digital capabilities, better penetration of digital channels and ease of cross selling. Additionally, investing in a higher agency workforce could incur heavier investments. Digitalisation will also be essential in smoothing customer experiences and minimising operating costs via automation. An opportunity in an underpenetrated market of RM13b in annual contribution has been identified, in which TAKAFUL only has a 16% foot in.

Post update, we leave no changes to our FY22E/FY23E assumptions.

Maintain OUTPERFORM but with a lower TP of RM3.90 (from RM4.25). Our newly ascribed PBV of 2.5x (from 2.2x) is reflective of a 30% discount from our hypothetical post-MFRS17 valuations of an industry leader which offers better dividend yield prospects and share price resiliency as compared to TAKAFUL. As for our hypothetical BVPS, we stretch our applied impact from FY23E retained earnings and EPS to 45% (from 30%) and 20% (from 15%) respectively, in line with the range-end of the group’s guidance.

In spite of the increased stress in our adjustments, capital upside opportunity is still present, indicating that any sell-down from MFRS17 implementation concerns could be overdone. Further, long-term investors may take note that MFRS17’s impact to the group’s financial statements should normalise within 5-6 years. TAKAFUL is also one of our preferred Shariah-compliant picks which we still like for its strong market position and solid ROE against other financial institutions.

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 - 17 Jun 2022