INVESTMENT HIGHLIGHTS

• FY17 earnings came in strong, and slightly expectations

• General and family takaful business are positive drivers

• Earnings for FY18 revised upward

• We maintain our BUY stance with an adjusted TP of RM4.65 per share

Earnings slightly above consensus. STMB’s FY17 earnings came in slightly above expectations. It accounts for 106.2% and 104.6% of ours and consensus’ full year forecast. The FY17 PAZTAMI grew by +17.3%yoy to RM206.7m. The same trend was seen for the quarterly earnings where 4QFY17’s PAZTAMI expanded +43.4%yoy.

Family and General Takaful products maintain its appeal to consumers. Operating revenue for FY17 grew +6.0%yoy, to register at RM2.1b stemming from higher sales generated by both family takaful and general takaful business. The growth for family takaful driven by its mortgage related product, leading to a +3.0%yoy increase in FY17 gross earned contributions. We also note that its net benefits and claims decreased by -12.0%yoy due to reduction in medical claims. Meanwhile, general takaful business saw its FY17 gross earned contributions climbed higher by +11.0%yoy to RM554.2m with motor and fire products as primary contributors. Despite the uptrend in general takaful business, we note that the FY17 earnings of the said segment were largely absorbed by higher net benefits and claims paid, which grew +33.0%yoy.

Combined ratio fared better. While we note that general segment faced higher benefits and claims paid, the group’s FY17 overall combined ratio remains at comfortable rate of 72.9%, improving by 4.6ppts yoy. Recall that the 4-year combined ratio averaged 79.6%.

Earnings revised upward. Given that FY17 earnings came in above expectation, we believe that an upward revision is warranted to take into account the increase in earnings, which supported by higher wakalah fee income. Hence, we adjust the FY18F PAZTAMI higher by +9.6% and introduce our FY19F earnings.

Valuation and recommendation. Consequent to the result, we maintain our BUY call on Syarikat Takaful. However our TP is adjusted lower to RM4.65 (from RM4.90) as we pegged its FY18 EPS to PER of 17x. We had lowered the premium we had accorded to the previous PER, as we factor in the overall risk coming from the IFSA requirement (splitting of insurance business), which will possibly incur higher than expected operational expenses. On the other hand, we believe STMB is well positioned to take advantage of the underserved consumer market, which is mostly represented by Islamic demographic population that favours takaful protection. Recall that Malaysia is facing low penetration of life/takaful insurance subscription issue circa 56.2% (vs 75% target by 2020). With greater intensity of digitalization adopted in the group’s operation, it will enable STMB to boost its core earnings reaching out to targeted market. As the only listed pure takaful player on Bursa, we view that the recent retracement of its share price makes the stock an attractive investment proposition.

Source: MIDF Research - 26 Jan 2018