INVESTMENT HIGHLIGHTS

• STMKB’s 1HFY19 earnings results of RM177.4m came in within our and consensus expectations

• We are expecting a lower growth rate in 2H19 on a yearover-year basis due to high base effect

• Fundamentals remain intact but recent rally resulted in steep valuation and modest dividend yield

• Downgrade to NEUTRAL with an unchanged TP of RM6.60

Within expectations. Syarikat Takaful Malaysia Keluarga Berhad (STMB)’s 1HFY19 earnings came in within our expectation, accounting for 52.3% and 48.3% of our and consensus’ full year estimates. It was not a surprise that it grew +47.3%yoy to RM80.9m, riding on its strong bancassurance partnerships and digital initiatives. The strong earnings growth was attributable to higher net Wakalah fee income arising mainly from continued double-digit growth in the Family segment.

Fundamentals remains intact. STMB’s 1HFY19 gross earned contribution jumped +31.6%yoy to RM1,337.7m, arising predominantly from its Family Takaful business which has increased by +44.0%yoy to RM967.5m. This was primarily due to the higher sales from creditrelated products. Meanwhile, the net claims declined marginally by - 2.1%yoy to –RM476.4m, attributable to lower claims (-11.0%yoy) from the general insurance segment, but partially moderated by the slight increase in net claims of +1.0%yoy at the Family Takaful segment. Thus, these have mainly contributed to the improved combined ratio to 69.1% (-16.2ppts yoy) and led to a higher underwriting margin of 30.9% (+16.2ppts yoy).

Earnings growth rate expected to taper off in 2HFY19. To recall, STMB’s earnings growth for 2HFY18 was primarily spurred by the new bancassurance partnership with Bank Rakyat to boost its credit-related products sales. Thus, we are of the view that the normalisation of the earnings growth might be warranted since it would be coming from a higher base. In addition, a potential further motor and fire liberalisation exercise in 2HFY19 would be a dampening factor to its general insurance segment as well.

Earnings estimates. We are maintaining our forecasts for FY19F and FY20F.

Target Price. We are maintaining our target price of RM6.60 by pegging its FY20 diluted EPS to a PE of 14x (two year historical average).

Downgrade to NEUTRAL. While the fundamental aspect of the company remains on track, we opine that these developments have mostly been priced in into the stock as reflected by the recent run-up of the company’s share price. The valuation of the company has become steep as evident from its current PE of 15.7x which is way above its 2-year historical trading PE of 14.4x. In addition, the dividend yield of the company is also losing its appeal at only 2.2%. Moreover, the potential further de-tariffication of the motor and fire insurance in 2HFY19 presents a less optimistic outlook on its general insurance segment. This segment alone contributes approximately 30.0% to its group’s gross earned contribution. Coming from a higher base, we are also of the view that earnings growth rate would possibly be tapering in 2HFY19 on a year-over-year basis as part of the normalisation effect. Coupled with an absent of capital upside and catalysts in the near-to-medium term, we are downgrading our recommendation on STMB to NEUTRAL (previously BUY).

Source: MIDF Research - 26 Jul 2019