TAKAFUL’s efficient operating setup should keep bottomline expansion healthy. Its strong balance sheet remains one of the leading merits of the group. BUY with a TP of RM6.85. We believe investors could be less re-active to earnings growth owing to the slowing traction but would continue to bank on the stock for its solid book. TAKAFUL commands a superior ROE of c.30% (vs industry average of 20%) while continuing to be a leader in the takaful insurance space.

Since July 2018, thanks to its bancassurance tie-ins (namely Bank Rakyat), TAKAFUL has been registering a solid growth trajectory, especially from its credit-related single-premium products. Going forward, the segment is likely to remain the biggest contributor (est. 50%) to top-line. The group should remain as a beneficiary of Bank Negara’s directive for a greater Islamic finance mix locally of 40% by 2020.

From its recent 1H19 results, the group posted healthier claims incurred ratio at 41.9% (-14.6ppt) and management expense ratio at 9.2% (-0.1ppt). Having built a strong top-line base, we believe the group could put emphasis on its already stellar operating ratios to further boost sustainability. This extends the group’s efforts to streamline its medical/employee benefits segments.

Digitalisation persists as a key driver in keeping costs lean, by enabling a lower commission channel of sales while also being a more assessable platform to cater to new and existing customers.

As a leader within the takaful insurance space, we expect the group to stand resilient against potential headwinds in the industry. Though Bank Negara’s fire class review looks to have been given another year, we believe it should not impact the group thanks to its well-diversified mix in general insurance products. Additionally, recent entrants are not expected to pose any threat to the group with its established industry presence coupled with synergistic partnerships. We also opine that the group’s buoyant operating numbers could give it plenty of room should there be a need to ramp up its competitive gear.

Source: Rakuten Research - 1 Oct 2019