FY22 net earnings of RM318.5m (-23%) came below our estimate due to lumpy reserves booked in 4QFY22. However, this is not likely to affect the group’s fundamentals and operations; hence, we kept our FY23F assumptions largely unchanged. We see opportunities amidst reservations of MFRS17’s earnings impact from FY23 onwards, as the group’s core businesses remain strong. Maintain OUTPERFORM with a higher rolled over TP of RM4.15 (from RM3.90).

FY22 missed. FY22 net profit of RM318.5m came below our forecast by 7% but is within consensus estimate (at 96%). The negative deviation appears to be due to a lumpy RM20.9m input of expense reserve as a reflection of higher Wakalah fee expenses from greater Family and General Takaful operations. This reserve is an accounting deferment and should be written back progressively. Meanwhile, the 13.5 sen final dividend (35% of earnings) declared is close to our anticipated 14.0 sen, thanks to a more generous payout against FY21 (+10ppts).

YoY, FY22 operating revenue improved by 18%, thanks to strength in both Family Takaful (mainly credit-related products) and General Takaful business (mainly motor and fire classes). However, combined ratio rose to 74.4% (+6.3ppts) as net claims ratio increased to 47.5% (+5.2ppts) on greater claims instances post-MCO restrictions. Meanwhile, other income dipped by 4% due to poorer realised gains and fair value losses in the group’s investment portfolio. With the incursion of the prosperity tax in FY22 as opposed to a net tax gain in FY21, FY22 net profit registered a 23% decline to RM318.5m.

Still a need for takaful products. The double-digit growth in the group’s revenue stream indicates that takaful products remains highly relevant in the market despite softening economic growth outlook. Credit-related products will continue to be sought in tandem with higher financing needs which are led by the group’s core Bancatakaful strategies. Digitalisation efforts are also enabling the group to have better penetration in previously inaccessible markets while promoting ease-of-engagement with existing customers. While further detariffication on fire and motor class insurance may be a threat to the group, we take comfort that their exposure is not as highly proportionate to listed peers (<30% combined earned premiums vs peer’s <65%).

Forecasts. Post model updates, our FY23F earnings are mostly unchanged as we believe our assumptions remain valid. Meanwhile, we also introduce our FY24F numbers.

We await further clarification on the transitional presentation of MFRS 17 before we incorporate the new standard into our earnings model.

Maintain OUTPERFORM with a higher TP of RM4.15 (from RM3.90), as we roll over our valuation base year to FY24F. 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 yields and resilient share price as compared to TAKAFUL. Our hypothetical BVPS is premised on an applied cut to our FY24F retained earnings and EPS by 45% and 20%, respectively.

In spite of the increased stress in our adjustments, capital upside opportunity is still present, as any share price weakness caused by concerns over MFRS17 implementation could be overdone. Furthermore, long-term investors should take note that MFRS17’s impact to the group’s financial statements should normalise within 5-6 years. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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 - 27 Feb 2023