Post MFRS 17, TAKAFUL’s 9MHFY23 net profit (+28% YoY) came within expectations. The group should continue to deliver growth fuelled by its effective Bancatakaful connections as well as widening products range and channels. Meanwhile, it may not be overly strained by the detariffication of fire class insurance given its relatively smaller exposure as compared to its general insurance peers. Maintain OP and PBV TP of RM4.10.

9MFY23 within expectations. TAKAFUL’s 9MFY23 net profit of RM276.8m made up 75% of our full-year forecast and 77% of consensus full-year estimates.

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, its 9MFY23 takaful revenue rose by 21% on stronger demand from both Family (from an increase in coverage) and General Takaful products (from greater fire and motor class business). However, takaful service results declined by 11% mainly due to the absence of lumpy reversal to claims liabilities. Alongside more retakafuls, this translates to a lower net takaful service margin of 7.5% (-2.7ppt). On the other hand, net investment income gained 56% on better fixed income performances and lower fair value losses. Overall, 9MFY23 net profit reported at RM276.8m (+28%).

Outlook. We continue to expect the group to see continued support with its Bancatakaful portfolio leading the charge for its credit-related products. On the flipside, the group is likely to be less susceptible to pressures seen in the fire class insurance space following further price liberalisation introduced in 2HFY23. The group’s general insurance business makes up less than 50% of topline contributions. Apart from widening its foothold in employee benefits and medical segments, the group is rolling out a multi-distribution platform which enables a wider outreach while providing access to more affordable products.

Forecast. Post results, we tweak our FY23F/FY24F earnings by - 2%/+1% from model updates to include 3QFY23.

Maintain OUTPERFORM and higher TP of RM4.10. Our TP is based on an unchanged 1.9x FY24F PBV, at a 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 - 24 Nov 2023