• The company was granted approval from BNM to operate in separate entities

• Expected to complete by the 2QCY18

• Benefit the company in the long run

• At this juncture, business fundamental remains intact

• Maintain BUY with unadjusted TP of RM4.90

Since establishment in 1985, the company has been operating under composite license which allowed the operation of both its family and general insurance businesses. Following a requirement under Sections 16(1) and 286 of the IFSA 2013 (refer Exhibit 3 and Exhibit 4), the company is subject to structural reorganization, once completed will require STMB to operate under separate licenses for family takaful and general takaful products.

Pursuant to Bursa’s announcement on 10th August 2017, we note that Bank Negara has approved the proposed reorganization submitted by the company in December 2016. As such, the central bank will issue family takaful business license to STMB under its new name Syarikat Takaful Malaysia Keluarga Berhad and another license for general takaful business to a new company named Syarikat Takaful Am Berhad, wholly owned subsidiary of STMKB.

The proposal is expected to complete by the second quarter of next year, pending further approval from shareholders and authorities (Refer Exhibit 1 and Exhibit 2).

Business fundamental remains intact. The company is expected to experience marginal increase in its management expenses, stemming from the need to hire more staffs to sustain the group’s operation moving forward. However, we opine that the Proposed Reorganization will keep the business fundamental intact, leaving no adverse impact to the top line numbers. This is premised on the growing demand of takaful products and positive development of Islamic finance in the local market. Interestingly, we note that the growth in earnings of takaful operators has consistently outperformed the conventional insurers’ over the past few years and we expect that this trend will continue.

Benefit the company in the long run. In light of the announcement, we believe that this exercise will benefit Syarikat Takaful in the long run and enhance its prospect as one of the biggest takaful provider in Malaysia. We understand that the said exercise will potentially create minor changes to current operation, to adapt with the transformation.

In terms of the group’s financial structure, the management has indicated that share capital and net gearing will be maintained at current level.

Recommendation. Although we believe the impact of this proposed reorganization would be minimal, we do not discount of possible adjustment to the group’s new internal CAR target and expected future CAPEX, as a result of license conversion. However, at current juncture, we make no changes to our assumptions and expectations given the minimal impact from this news. We continue to like STMB based on the above mentioned points. Our BUY call on the stock remains with unchanged TP of RM4.90.

Source: MIDF Research - 14 Aug 2017