TAKAFUL’s FY23 results disappointed due to lower retention ratios. We continue to expect TAKAFUL to deliver strong ROEs in spite of our 9% earnings cut in FY24F. We also lower our TP by 6% to RM3.85 (from RM4.10). Its valuations have become rich after the recent run-up in its share price. Downgrade to MARKET PERFORM from OUTPERFORM.

FY23 missed. TAKAFUL’s FY23 net profit of RM346.9m missed both our forecast and the consensus consensus by 6%. The variance against our forecast came largely from greater-than-expected retakaful within group’s General Takaful segment.

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 FY23 takaful revenue rose by 15% on stronger demand from both Family (from an increase in coverage) and General Takaful products (from greater fire and motor class business). However, net takaful service results fell by 15% as the group saw lower policy retention with a higher retakaful allocation on General Takaful products. This translates to a lower net takaful service margin of 5.9% (-2.1ppt). On the other hand, net investment income gained 36% on better fixed income performances and lower fair value losses. Overall, FY23 net profit reported at RM346.9m (+23%).

QoQ, 4QFY23 takaful revenue expanded 55% mainly due to stronger credit-related Family Fund products, likely stemming from greater yearend loan disbursements. However, the period also incurred a higher service expense margin from higher claims incidences. Attributed to the lower topline, 4QFY23 net profit of RM70.3m was softer by 23%.

Outlook. TAKAFUL’s continues to make stride in gaining market share with the widening of its Bancatakaful, Treasury, Employee Benefits and general takaful products. The group’s books could be fuelled by an upcoming multi-distribution platform, which aims to expand its outreach to undertapped segments. Based on its portfolio of products, we continue to view TAKAFUL to be less at-risk by price competition arising from the liberalisation of fire class insurance.

Forecasts. We trim our FY24F earnings by 9% as we adjust for lower takaful results from higher retakaful allocations. Meanwhile, we also introduce our FY25F numbers.

Valuations. We also lower our TP by 6% to RM3.85 (from RM4.10), having recalibrated our valuation benchmarking for the insurers within our coverage following their full-year reporting under MFRS 17.

Against the industry average PBV of 2.1x, we attach a 25% discount to TAKAFUL’s FY24F BVPS at 1.7x (from 1.9x) on the back of: (i) lower net margins of 11% (vs peer’s 17%), and (ii) lower dividend returns of 4%-5% (vs peer’s 6%-7%), which may dilute its strong ROE proposition. Hence, TAKAFUL’s merit of lower sensitivity to detariffication may also be fully captured at current price points. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Downgrade to MARKET PERFORM from OUTPERFORM as its valuations have become rich after the recent runup in its share price.

Source: Kenanga Research - 27 Feb 2024