Post MFRS 17, TAKAFUL’s 1HFY23 net profit (+30% YoY) beat our expectations from supportive demand for its core products. We anticipate the momentum to remain strong with investment results looking to benefit from improved market conditions. Competition may arise from fire and motor class insurances but TAKAFUL has relatively lower exposure here as compared to its peers. We raise our FY23F/FY24F earnings by 14%/13% and raise our PBV TP to RM4.10 (from RM3.90). Maintain OUTPERFORM.

1HFY23 above expectations. TAKAFUL’s 1HFY23 net profit of RM185.7m beat our expectations, making up 57% of our full-year forecast but was within consensus’ full-year estimate (51%). The positive deviation from our end could be due to overly conservative growth forecast in net earned premiums and investment gains.

Effective 1 Jan 2023, the group has applied the new MFRS 17- Insurance Contracts standard to replace MFRS 4 which uniformly distributes revenue recognition of takaful and retakaful contracts but also changes accounting presentations, such as the removal of “net earned premiums” for “takaful service result”.

YoY, 1HFY23 takaful revenue increased by 18% on the back of stronger demand for both Family (from an increase in coverage) and General Takaful products (from greater fire and motor class business). That said, takaful service results declined by 8% on rising claims which brought up service expense margins to 85.3% (+4.0ppts). On the other hand, we saw investment income doubling, thanks to fixed income gains paired with lower fair value loses. All in, this brought 1HFY23 net profit to report at RM185.7m (+30%).

Outlook. The group appears to be enjoying healthy traction thanks to its sustained Bancatakaful portfolio helming its key credit-related products. The group has also ventured into other segments (i.e. employee benefits, medical) to boost its offerings. On the flipside, the pending further detariffication on fire and motor class insurance in 2HFY23 may stir price competitions within the space. That said, the group faces a lower exposure for these insurance classes, which makes up <30% of topline contributions as opposed to peers with up to <65% total dependency.

Forecast. Post results, we raise our FY23F/FY24F earnings by 14%/13% to mainly account for better takaful revenues and better service results and investment gains which we had previously anticipated to normalise.

Maintain OUTPERFORM with a higher TP of RM4.10 (from RM3.90). Our TP is based on an unchanged 1.9x FY24F PBV, being 30% discount against a leading peer. We believe TAKAFUL offers a distinctive opportunity to tap into the growing shariah market. Meanwhile, its industry leading ROEs could act as buffers against possibly intensifying market conditions. Additionally, its relatively lower exposure to detariffication-sensitive portfolios could be a point of comfort for investors. 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 - 30 Aug 2023