As forecasted in our 2 May results preview, STMB posted a strong 1QFY13, with its MYR32.2m core earnings accounting for 28% of our full year forecast. Wakalah income surged as a result of the complete utilization of the wakalah model in all of its businesses starting from 1Q. We raise our valuations to 14x P/E, from 12x previously, on higher earnings growth expectations and its superior ROEs vs conventional peers. Our new FV of MYR9.70 offers a 30% upside.

Family takaful earnings drive growth. Syarikat Takaful Malaysia (STMB)’s family takaful gross contributions grew 14.6% y-o-y and 43.7% q-o-q to MYR285m, which was a new high compared to the quarterly contributions in FY12 and FY11. We attribute this to the strong sales from across distribution channels, particularly its bancatakaful and agents. Correspondingly, the company recognized a 127% y-o-y surge in wakalah income to MYR123.1m from the family takaful segment. Given the higher wakalah income recognition, the surplus transferred to  the shareholders’ funds was 30% lower than in 1QFY12  (after stripping out the one-off MYR4.7m release in technical reserves due to a change in actuarial estimates for the Group’s family takaful products in 1QFY12)

General takaful growth was flattish. Its general takaful segment’s gross contribution grew 16.5% y-o-y, but was down 9.8% q-o-q. Although the Group recognized more wakalah income (>200% growth y-o-y), the transfer of its surplus to shareholders’ funds was 21% lower than in 1QFY12. We believe that the company’s initiative to boost the non-motor general takaful business via its enhanced corporate agency and sales force has yet to fully materialize.

FV raised to MYR9.70. We increase our FV to MYR9.70 (pegged to 14x FY13 EPS) from MYR8.00 previously. We believe STMB deserves a higher P/E, given its higher earnings growth expectations vs domestic conventional insurers, as well as its strong niche exposure to the takaful industry, which is anticipated to grow by 20%-25%. While our FV implies a FY13 P/BV of 2.8x, we deem it fair given that STMB's ROE of 21% is more superior than that of other insurance stocks in our coverage. We have also upgraded our FY14 forecasts by 4%.

Source: RHB