9MFY22 PATAMI of RM243.7m (-5%) is within expectations. TAKAFUL will likely be a beneficiary of recovering economic activity as affordability becomes a non-issue against protection needs. We do not anticipate much stress from the detariffication of fire insurance as the group’s key portfolio likely remains to be its credit related offerings. Maintain OP and MFRS 17 adjusted-TP of RM3.90. TAKAFUL is one of our 4QCY22 Top Shariah Picks.

9MFY22 within expectations. 9MFY22 PATAMI of RM243.7m accounted for 71% of our full-year forecast and 75% of consensus full-year estimate. No dividend was declared as expected, as the group typically pays a single final dividend in its last quarter.

YoY, 9MFY22 operating revenue rose by 20% thanks to growth in both Family Takaful (mainly credit-related products) and General Takaful business (mainly motor and fire classes). However, combined ratio was 7.3ppt higher (at 75.4%) as net claims ratio stretched to 48.1% (+4.5ppt). This was likely spurred by higher claims instances against last year’s MCO period. Meanwhile, other income (-11%) fell on the back of fair value losses. Overall, 9MFY22 PATAMI reported at RM243.7m (-5%) post prosperity tax impact.

Riding on stronger economic backbone. With the revitalisation of local economic activities, we believe that takaful products could see a return in demand. In particular, credit-related products could pick up from this as affordability concerns wane amongst retail customers from better income and employment prospects. Meanwhile, the group is likely reinforcing its bancatakaful strategies with a more digitalised front enabling better distribution. Although the further detariffication of fire class insurance products could make the space more competitive, it would be a less meaningful contributor to group premiums as opposed to motor class and family takaful products.

Forecast. Post results, we leave our FY22F/FY23F earnings unchanged.

Maintain OUTPERFORM and TP of RM3.90. Our ascribed PBV of 2.5x 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. Our hypothetical BVPS is premised on an applied cut to our FY23E retained earnings and EPS to 45% and 20%, respectively. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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 one of our 4QCY22 Shariah-compliant Top 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, (iii) higher-than-expected management expense ratio, and (iv) further wave of pandemic.

Source: Kenanga Research - 2 Nov 2022