INVESTMENT HIGHLIGHTS

• Results came in above expectations driven by strong growth contribution momentum

• Combined ratio slightly improved due to lower claims

• Earnings forecast revised up for FY19

• Maintain BUY with revised TP of RM4.75

Above expectations. Syarikat Takaful (STMB) reported strong growth of +43.0%yoy for its 12MFY18 PAZTAMI, to RM292.6m. This translated to 118.23% and 116.12% of ours and consensus’ full year estimates respectively. On a quarterly basis, its 4QFY18 PAZTAMI increased by +62.0%yoy to RM90.1m.

Driven by continued strong growth momentum in net earned contributions. STMB’s 12MFY18 net earned contributions grew by +27.6%yoy to RM1,941.5m. This was attributed to the increase of +27.0%yoy and +24.0%yoy in gross earned contributions from both its Family and General Takaful businesses respectively. Notably, the main growth drivers in Family and General Takaful continued to be creditrelated products and fire and motor classes respectively. The growth in Family Takaful was also in line with the industry growth trend, which is growing at a faster pace than conventional and general takaful market.

Combined ratio continued to show improvement. The group’s FY18 combined ratio was at a healthy level of 69.5%, representing a net decrease of -3.4ppts(yoy). This was due to the downtick in the group’s claims ratio and management expense ratio of -1.9ppts(yoy) and -1.5ppts(yoy) respectively. As a result, underwriting margin improved +3.4ppts(yoy) to 30.5%. It was worth noting that the FY17 net benefits and claims for Family and General Takaful have increased by +19%yoy and +40%yoy respectively. However, this still translated into lower claims ratio due to stronger growth pace in net earned contributions.

Strong performance thus far. The group has continued its strong foothold in the takaful market in FY18 despite weak market sentiments and poor equity market performance. Other income dropped by - 19.5%yoy to RM326.8m as a result of mainly fair value losses of RM80.5m from RM7.5m in the prior year. However, we believe the group’s digital strategy and prudent underwriting has been instrumental to the strong double-digit growth in its underwriting business for the year.

Earnings estimate. We are revising up our FY19 forecast by +25.0% as we take into account the continued strong momentum in its Family and Takaful businesses.

Recommendation. We are maintaining our BUY call on Syarikat Takaful and revised the TP to RM4.75 (from RM4.49) as we peg its FY19EPS to PER of 12.9x (one SD below two-year average PE). This is premised on STMB to continue to perform at similar growth level in FY19. Recall that the Malaysian Government has announced initiatives in 2019 to stimulate the development of the insurance sector such as the monthly tax rebate of RM250 for life and takaful insurance products. This will most likely prompt non-policy holders to take up insurance products. Also, we opine STMB is optimised to capitalise on the favourable government stimulus and the strong interests in takaful products as driven by (1) rapid expansion of its digital platform, and (2) the increasing up-take of Islamic financials products and services. On an industry level, Family takaful remains to be the most profitable, in which it represents circa 70% of STMB’s gross earned contributions.

Source: MIDF Research - 25 Jan 2019