INVESTMENT HIGHLIGHTS

• Syarikat Takaful posted earnings of RM69.8m for 1QFY18

• General Takaful was the darling in 1QFY18

• Earnings forecast revised up for FY18 and FY19

• We maintain our BUY call with adjusted TP of RM4.44

Syarikat Takaful posted earnings of RM69.8m for 1QFY18. The results were above our expectations, accounting for 32.6% of our FY18 estimates. In comparison to the same period last year, earnings grew by +23.3%yoy. STMB’s gross earned contributions, which accounted part of operating revenue, displayed the same trend. It grew by +7.6%yoy to RM506.3m. Besides higher Wakalah fee income, earnings growth was also driven by the increase in contributions of general takaful, whihch expanded +27.2%yoy to RM182.4m. Given the encouraging rise of general takaful business, it currently accounts for approximately 36.0% of the group’s overall takaful funds, from 30.4% in 1QFY17.

General Takaful was the darling in 1QFY18. We are encouraged to see that STMB’s growth in the general segment was still resilient, despite the industry headwinds due to motor insurance liberalizations. Motor and fire classes remained as growth drivers, driving double-digit growth in 1QFY18. However, it is worth noting that both classes partly contributed to the higher claims and benefits of +16%.

Family takaful was mostly flat in 1QFY18. Earnings from family takaful were mostly flat in the quarter, with gross earned contributions recorded at RM324.0m. In terms of net benefits and claims, it increased by +10.0% to RM210.6m due to higher death and surrender claims. While we saw 1QFY18 proved to be challenging for Family Takaful business, we are optimistic that contributions will remain elevated, supported by the group’s marketing effort to reach wider market.

Combined ratio still healthy. Despite claims and benefits paid was seen trending up in 1QFY18, the group’s overall combined ratio remains at comfortable rate of 75.5%. This was -1.3ppts yoy lower than last year’s level. Recall that the 4-year combined ratio averaged 79.6%. Meanwhile, we see management and commission expenses are showing good signs. Both expenses were seen decreasing by -0.9ppts yoy and - 0.4ppts yoy respectively, absorbing the increase in the group’s overall claims and benefits paid.

Impact on earnings. Given that results came in above our expectations, we are revising up our FY18 and FY19 forecasts by +7.4% and +1.6% respectively. This is taking into account the encouraging growth of general class.

Maintain BUY. We are maintaining our BUY call on Syarikat Takaful. We adjusted the TP to RM4.44 (from RM4.65) as we rollover our valuation to FY19. The change in our TP is due to adjusting our PE multiple to 15x from 17x previously as we change the historical average period to 5 years from 3 years. We believe this is fair as it better reflect the stable period. Moving forward we believe that the group will be able to expand its foothold in the takaful market, supported by its long-term strategic focus in the new digital market. While we believe traditional distribution channels such as banca and agency will remain important, we foresee its new digital online channel will be able to capture wider market share. With more products expected to be rolled out via the digital platform, we are positive that it will be a key earnings driver. According to management, the traction for these new products has been encouraging given its convenience and seamless purchasing process. Additionally, more initiatives are planned including innovation in online underwriting. This will enable the company to achieve better performance metrics including high straight through processing rates and quick turnaround time.

Source: MIDF Research - 25 Apr 2018