STMB’s 1HFY13 net profit of MYR65.9m beat expectations, forming 59% of  our  FY13  forecast,  as  it  recognised  higher-than-expected  general takaful  wakalah  income.  We  upgrade  our  FY13F/14F  EPS  by  3-4%  and FV  to  MYR11.30  (from  MYR11.00)  as  we  adjust  our  wakalah assumptions.  STMB  remains  our  Top  BUY,  given  its  inexpensive valuations vs similar-sized listed peers trading at 14.0-20.0x P/E.

- Strong wakalah growth. Wakalah income recognition was higher-than-expected,  due  to  the  full  adoption  of  the  wakalah  model.  The  general takaful  segment  recognised  21.9%  more  wakalah  income  vs  2Q12, despite the sluggish growth in 2Q13 general takaful contributions (-9.3% y-o-y;  -13.5%  q-o-q).  The  weak  topline  growth  was  mitigated  by improved  underwriting  margins,  given  steady  claims  ratios  of  ~50%, while its Management expenses ratio improved to 18% (1Q13: 25%).  

- Family  takaful  performance.  STMB’s  2Q13  overall  topline  gross contributions  growth  (+4.5%  y-o-y;  +4.9%  q-o-q)  was  supported  by  its family  takaful  segment’s  bancatakaful  and  agency  sales  performance (+12.2%  y-o-y;  +10.6%  q-o-q).  However  both  wakalah  income  and surplus  declined  by  19% and 10% q-o-q  respectively, due  to  a  surge in family  takaful  claims  (+53.6%  y-o-y;  +94.7%  q-o-q)  that  catered  for certain  product  maturities.  Its  underwriting  margins  downside  was fortunately  mitigated  by  a  strong  performance  in  investment  income (+41.9% y-o-y; +11.1% q-o-q). In 2H, family takaful contributions growth is expected to soften. That said, STMB’s results will remain intact, as we expect  the  unusually  high  claims  experience  in  this  quarter  to  be  non-recurring.

- FV  upgraded  to  MYR11.30.  We  adjust  up  our  wakalah  income assumptions for the general takaful segment and increase our expenses ratios  forecast,  giving  rise  to  an  overall  FY13F/FY14F  EPS  upside  of 2.5%/3.8%  (please  see  Figure  5  for  assumption  changes).  Our  new MYR11.30  FV  is  pegged  to  an  unchanged  14x  FY14F  EPS.  While STMB’s 1H13 results is still significantly above our  revised forecast, we expect 2H profits to be traditionally softer. It could face minor headwinds in its bancatakaful business, which is exposed to tightening measures on household  debt.  We  still  like  the  stock  for  its  undemanding  valuations, and  potential  dividend  upside  (details  may  be  proposed  as  early  as 3Q13).

Source: RHB