KEY INVESTMENT HIGHLIGHTS

• STMB’s 2Q20 earnings broadly within expectations
• 2Q20 earnings fell 7%yoy but this was cushioned by gains in the equity market
• Net earned contribution deteriorated (-37%yoy) in 2Q20 while combined ratio ticked up
• Maintain NEUTRAL at unchanged TP of RM4.82

Decent 2QFY20 performance. Syarikat Takaful Malaysia Keluarga Berhad (STMB) reported a net profit of RM75m for its 2Q20, which brought 1H20 earnings to RM177m. This was broadly within expectations at 55% and 52% of our and consensus’ FY20F respectively. 2Q20 net profit fell 7%yoy to RM75m but 1H20 earnings was pretty much resilient (-0.4%ytd).

Sales contraction. STMB’s net earned contribution fell by 37%yoy to RM336m in 2Q20 on the back of a 30%yoy fall in gross earned contribution. This was primarily due to lower sales for the Family Takaful business; gross earned contribution (GEC) for Family Takaful fell 41%yoy to RM276m. GEC from General Takaful was more resilient, registering just a 2%yoy fall to RM163m.

Combined ratio ticked up. Combined ratio was up 10ppts year-onyear to 78.3%. This was driven by higher management expenses ratio (+5.3ppts to 22.8%) and higher claims ratio (+5ppts to 46.3%). However, these are mainly a function of the lower net earned contributions.

Investment gains cushioned the impact. Gains (both FV and realized) on investments registered a significant increase to RM68m (from RM23m in 2Q19) mainly due to the equity market performance. This cushioned the overall earnings impact of the slowdown in the period on the group’s earnings.

Recommendation. Maintain NEUTRAL on STMB at unchanged TP of RM4.82, pegging the group at 12.8x FY21F PER (2-year historical average). FY20F outlook is likely to be less promising, predominantly due to the weakening economic indicators arising from the Covid-19 outbreak. Nonetheless, we are cautiously optimistic on the group weathering 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. The relatively low combined ratio also enables the group to safeguard its profitability.

Source: MIDF Research - 26 Aug 2020