• Keep BUY and MYR4 TP, 21% upside and c.5% FY22F yield. 9M22 earnings met our expectations on a strong 3Q22, with record-high gross earned contributions (GEC) mitigated by higher claims and 1H22 fair value losses. We still like Syarikat Takaful Malaysia Keluarga for its sound fundamentals and undemanding valuation. The strong 3Q22 results could put STMB in a better position to adopt the new Malaysian Financial Reporting Standards 17 (MFRS 17) regulations than previously anticipated.

• 9M22 results within expectations. STMB recorded 9M22 earnings of MYR243.7m – in line with our and Street forecasts. GEC grew a substantial 20% YoY from strong double-digit growth in both the family and general segments. Combined ratio was up slightly to 75.4% from 69.7% due to the large number of claims incurred earlier during the year. Net profit was down 4.6% YoY, but mainly due to the recognition of Cukai Makmur – 9M22 PBT of MYR366m was a 23% increase YoY.

• Family takaful results. 9M22 GEC gained 22% YoY on higher credit insurance sales. Claims ratio was a slightly elevated 48% (9M21: 44%) due to the spike in claims in 1Q22. Claims have since normalised to the tune of 38% in 3Q22 and, coupled with higher investment gains on top of strong GEC growth, led to a quarterly surplus of MYR226m for the segment (+46% YoY, +88% QoQ).

• General takaful results. The general segment posted a second consecutive quarterly deficit of MYR6.9m (2Q22: MYR6.2m deficit, 3Q21: MYR25.4m surplus). This was mainly due to higher claims incurred (+42% QoQ, +67% YoY) and wakalah fees (+17% QoQ, +20% YoY), which offset the strong GEC growth (+11% QoQ, +18% YoY).

• Strategy and outlook. Moving forward, STMB will continue to leverage on its bancatakaful partners to push sales of high-margin mortgage insurance and personal financing insurance products under the family takaful umbrella. Growth in mortgage insurance will also benefit fire insurance sales, in our view, which will positively affect the general segment. For FY23, management retained its guidance for high single-digit GEC growth. We also understand the strong bottomline performance in 3Q22 implies a better-than-initially-anticipated contractual service margin or CSM balance estimate under MFRS 17. This, in turn, presents a downside risk to management’s 15-20% full-year (downward) earnings adjustment guidance following adoption on 1 Jan 2023.

• We keep FY22F-24F earnings unchanged as the results were in line. Our TP is kept at MYR4 and includes a 2% ESG premium baked in as per our in-house proprietary scoring methodology. STMB is currently trading at 1.4x FY22F P/BV, near -1.5SD from the stock’s 5-year mean. Valuations are compelling to BUY into the largest listed takaful player, which is charting outstanding GEC growth.

Source: RHB Research - 2 Nov 2022