Syarikat Takaful’s 1Q14 net profit of MYR35m is in line, comprising 22% of our forecast. Efficiency in expense control and improved loss ratios in  GT  outweighed  its  investment  performance  and  lower  revenue growth in  group  FT  –  a temporary weakness  that  we had expected. We retain  our  forecasts as we expect sustained growth momentum ahead. Maintain BUY and FV at MYR15.00 (13x FY15F P/E).

• 1Q14 review.  Syarikat  Takaful  Malaysia (Syarikat Takaful)’s 1Q14 core net profit of MYR35m  (+9% growth) is in line with our forecast. Improved claims  ratios  at  the  general  takaful  (GT)  fund  and  controlled management expense, partially helped by a release of expense reserve from expiry of renewal policies, shouldered the bottomline g rowth. Profits were down q-o-q (-24%) mainly due to declining group family takaful (FT) contribution  and  investment  performance.  It  also  resulted  in  lower surplus transfer to the operator.
• Contribution  in  a  challenging  retail  growth  environment.  We  had expected  the  temporary  weakness  in  1Q14  contributions  coming  from the  credit  wakalah  products,  as  contributions  from  a  key  bancatakaful partner  reduced  to  a  FT  low  of  5%  from  1H13’s  20%. We  understand that  the  treasury  business  experienced  slower  disbursements  of mortgage  reducing  term  takaful  (MRTT),  another  group  FT  product, which could pick up pace after 1Q. This  points to  the  challenging  retail lending environment, but we firmly expect solid growth ahead.
• Investment performance.  The lower investment income from both the FT  and  GT  funds was due to the challenging market environment. We note  that  there  was  an  MYR8.7m  impairment  loss  on  the  FT  fund,  an unusually large amount on a quarterly basis, which could be recovered in subsequent quarters as realised gain in investment.
• Maintain  BUY  with  MYR15.00  FV.  This  is  pegged  to  13x  FY15F  P/E (from  14x  FY14F  P/E).  While  our  FV  implies  a  3.4x  FY15F  P/BV,  we deem  this  fair,  given  its  superior  ROEs  vs  peers.  The  stock  hasexperienced  better  institutional  participation  following  higher  dividend payouts, ROEs and capitalisation. We maintain our forecasts, but expect the  company  to  issue  a  final  dividend  instead  of  several  interim dividends.
• Catalysts and risks. Regulations that favour standalone  takaful  players (which  may  boost  its  Indonesian  business)  and  its  ability  to  capturemarket share in the conventional insurance space  are the  key  catalysts. Competition,  claims  exposure  and  a  potential  split  of  its  GT  and  FT entities are a few of the risks.

Source: RHB