KEY INVESTMENT HIGHLIGHTS

• STMKB’s 4QFY19 normalised earnings fell by -17.4%yoy to RM75.7m, mainly due to higher management expenses

• STMKB’s FY19 normalised earnings rose by +23.7% to RM364.8m which is within our expectation

• However, we opine that the potential deal loss of RHB Islamic Bank and increasingly competitive landscape might put earnings under pressure moving forward

• Maintain NEUTRAL with a revised TP of RM5.10

Within expectation. Syarikat Takaful Malaysia Keluarga Berhad (STMB)’s FY19 earnings grew by +23.7%yoy to RM364.8m. This came in within our and consensus’ expectation, accounting for 97.1% and 97.2% 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. Nonetheless, the group’s 4QFY19 earnings fell by -17.4%yoy to RM75.7m, primarily due to higher management expenses and lower growth in gross earned contributions.

Lowest quarterly earnings in FY19. We observed that earnings growth turned negative in 4QFY19 (-17.4%yoy) as compared to 1QFY19, 2QFY19 and 3QFY19 growth of +38.3%yoy, +60.5%yoy and +33.8% respectively. This was also the lowest recorded quarterly earnings in FY19 of RM75.7m in comparison to RM96.4m, RM80.9m and RM112.3m in 1Q, 2Q and 3QFY19 respectively. We opine that this was primarily due to the sharp decline in the growth of net earned premium from an average of above +20% in the first three quarters of FY19 to about +6.7% in 4QFY19. In addition, the ongoing motor and fire liberalisation exercise to be adding downward pressure to its general insurance segment as well.

Loss of a bancatakaful partner in FY20. To recall, RHB Islamic Bank has decided not to renew their bancatakful service agreement with STMB upon expiry on 31st July 2020. We estimate that earnings might drop more than by -5% due to the fallout of the deal. However, STMB could still take part in the bidding process and get a fair chance to renew the contract. Even if they do win the bidding, we believe the margins from this deal will be lower in view of the increasing entrants of takaful providers and products in the market.

Potential deterioration in combined ratio. Due to the potential further tapering growth in net earned contribution in FY20, we opine that the group’s combined ratio to worsen to above 70%. This is predicated on the expected increase in management expenses ratio and claims ratio. Note that the group’s 4QFY19 management expenses rose to above 20% for the first time in two years, indicating the need of increased expenses to compete in the increasingly tough operating environment.

Earnings estimates. In light of the increasingly tough competitive landscape and potential loss of RHB Islamic Bank as a bacantakaful partner, we are revising downwards our forecasted FY20 and FY21 earnings to RM329.0m and RM337.9m respectively. This is taking into account our assumption of lower gross earned contribution and higher management expenses.

Target Price. In light of the downward adjustment to our earnings estimate, we are revising downward our target price to RM5.10 (previously RM6.60). This is premised on pegging its FY20 diluted EPS to a PE of 12.8x (two-year historical average). Note that we have lowered our PE assumption from previously 14.0x to 12.8x in view of the increasingly competitive landscape and tapering earnings growth rate.

Maintain NEUTRAL. We are of the view that outlook of the group in FY20 to be less promising, predominantly due to the expected lower growth of contributions from both its Family and General takaful segment. The potential loss of a bancatakaful partner (i.e. RHB Islamic Bank) might further jeopardize earnings growth in 2HFY20. In addition, we view that the combined ratio might further weaken to above 70% due in large part of lower growth in net earned contribution. 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. Meanwhile, we are also cautiously optimistic on the group to weather the increasingly competitive environment as the group continues to invest in digital initiatives and deals with Bank Rakyat, Bank Islam and Affin bank remain intact. All factors considered, we are maintaining our NEUTRAL recommendation on STMB.

Source: MIDF Research - 26 Feb 2020