TAKAFUL’s 1HFY24 results (+5%) met expectations. The group’s short-term woes of lower service revenues were offset by gain from fixed income markets, thanks to their lowering rates. Its long- term income sustainability will be cemented by its new digital efforts and supported by well-established Bancassurance channels. Maintain OP and TP of RM4.35. TAKAFUL is one of our Shariah Top Picks.

1HFY24 within expectations. TAKAFUL’s 1HFY24 net profit of RM195.4m came in at 54% of our full-year forecast and 50% of consensus full-year estimate.

YoY, 1HFY24 net profit increased by 5% mostly on the back of stronger fair value gains from its fixed income assets, granted by declining yield rates from bonds. We highlight that the group’s gross takaful service result dipped by 63%, following heavier unwinding of family takaful contract liabilities. However, this also translated to a significantly lower requirement for retakaful, which led takaful service results to only decline by 27%.

QoQ. 2QFY24 net profit declined by 9% as the same improvements to net investment gains was undermined by more underwritings, likely being clumped during 1QFY24’s seasonality.

Outlook. Though the group may seem to be mostly supported by its gains from investment, TAKAFUL has made strides to stimulate organic growth from its digital initiatives to provide more assessable service to its general and family takaful products.

Meanwhile, its core pipeline of credit-related takaful products will be supported by its Bancatakaful network. Based on its relatively low exposure to the fire class insurance space (estimated to be in the low- teens of overall contract assets), we continue to view TAKAFUL to be less at risk to price competition arising from the liberalisation of fire class insurance.

Forecasts. Unchanged.

Valuations. Our TP of RM4.35 is based on an unchanged 1.7x FY25F PBV. This comes at a discount against the industry average PBV of 2.1x 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%).

TAKAFUL’s lower sensitivity to detariffication is further emphasised with the strong growth seen in its other business segments. On the other hand, its leading ROE against peers could make up for its softer performing metrics. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain it at OUTPERFORM and as one of our Shariah Top Picks.

Risks to our call include: (i) lower premium underwritten, (ii) higher- than-expected claims incurred, and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 2 Sep 2024