KEY INVESTMENT HIGHLIGHTS

• STMKB 9MFY19 normalised profit increased by +42.2%yoy to RM290.5m which came in above our expectation

• Continued healthy growth rate for its 9MFY19 net earned contribution (NEC) which rose by 27.2%yoy to RM1.7bn

• 9MFY19’s combined ratio improved by -17.3ppts yoy to 68.0% as mainly driven by lower claims ratio of 41.4% (- 15.1ppts yoy)

• Nonetheless, earnings growth rate has shown signs of tapering and current valuation remains fair at this juncture

• Maintain NEUTRAL with an unchanged TP of RM6.60

Profit growth remains solid… Syarikat Takaful Malaysia Keluarga Berhad (STMB)’s 9MFY19 earnings grew by +42.2%yoy to RM290.5m. This came in above our but within consensus’ expectation, accounting for 85.7% and 80.4% of the full year estimates respectively. The firm earnings growth was attributable to higher net Wakalah fee income arising mainly from continued double-digit business growth in the Family Takaful segment and higher net investment income. Note that the General Takaful segment only posted mildly positive growth as we opine it was moderated by the ongoing liberalisation phase of the Malaysian general insurance industry.

...underpinned by steady fundamentals. STMB’s 9MFY19 gross earned contribution jumped +25.9%yoy to RM2.0bn, arising predominantly from its Family Takaful business which has increased by +36.0%yoy to RM1.1bn. This was primarily due to the higher sales from credit-related products. Meanwhile, the net claims declined marginally by -1.4%yoy to –RM727.9m, attributable to lower claims (-8.0%yoy) from the general insurance segment. However, we not that there were a slight increase in net claims of +1.0%yoy at the Family Takaful segment. Coupled with higher NEC, these have contributed to the improvement in combined ratio to 68.0% (-17.3ppts yoy) and led to a higher underwriting margin of 32.0% (+17.3ppts yoy). We opine that its bancassurance partnerships and digital initiatives continue to keep both its sales demand strong and operating cost lean. Furthermore, investment income also jumped by +13.5%yoy to RM268.9m.

However, growth rate seems to be tapering off. Coming from a higher base and normalisation factor, we observed that earnings growth have tapered off in 3QFY19 as compared to 1QFY19 and 2QFY19 growth of +38.3%yoy and +60.5%yoy respectively. 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. In addition to the high base effect, the ongoing motor and fire liberalisation exercise to be adding downward pressure to its general insurance segment as well.

Earnings estimates. In light of the better-than-expected earnings, we are revising our forecasted FY19 earnings by +10.8% to RM375.7m. This is taking into account our assumption of higher gross earned contribution and lower claims. Note that we are making a marginal upward adjustment to our forecasted FY20 by +0.9%yoy to RM392.6m in view of higher base effects and normalisation factor.

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

Maintain NEUTRAL. We remain optimistic of the strong fundamental aspects of the company, particularly with the growth from its Family Takaful segment. The bancassurance partnership model and efficient operation through digitalization continue to be core factors in driving the company’s earnings growth prospects. We are also of the view that with a relatively healthy combined ratio of 68.0% gives the company much bigger headroom to grow its portfolio. However, the ongoing de-tariffication of the motor and fire insurance continues to present a less encouraging performance from its general insurance segment. This segment alone contributes approximately 30.0% to its group’s gross earned contribution. Moreover, the earnings growth seems to be gradually tapering down albeit still at a solid double-digit growth rate due to effects from a higher base and normalization. Also, we opine that the valuation of the company has become relatively not attractive as it is trading close to its 2-year historical trading PE of 13.9x. A dividend yield of 2.4% from the group is not particularly appealing at the moment as well. All factors considered, we are maintaining our NEUTRAL recommendation on STMB.

Source: MIDF Research - 25 Oct 2019