• Still BUY, with new MYR3.90 TP from MYR4, 15% upside and c.5% yield. Syarikat Takaful Malaysia Keluarga reported its first set of quarterly results aligned to the Malaysia Financial Reporting Standards 17 (MFRS 17), which showcased a 21% PATAMI rise mainly from greater investment returns. We continue to advocate a BUY on the stock, as the current valuation appears inexpensive for the only listed takaful player in Malaysia.

• MFRS17 impact. On Day 1 of the transition, total assets were adjusted downwards by 5% to MYR12.1bn, while liabilities stayed largely flat at MYR10.9bn. 33% was shaved off total equity upon establishment of the contractual service margin (CSM), which is now recorded under liabilities. The opening CSM balance stood at MYR1.12bn, while equity totalled MYR1.24bn post-adjustment. 1Q22 net profit was restated down by 11% from the change in profit recognition timing for long-tail takaful contracts.

• Group results review. Takaful revenue was up 17% YoY from stronger sales from both the family and general takaful funds. However, higher claims incurred from both funds led to a 19% decline in takaful service results. Investment returns doubled YoY, mainly due to large fair value losses on fixed income instruments in 1Q22. Overall, 1Q23 net profit of MYR93.4m was a 21% increase YoY.

• Family fund. Takaful revenue growth of 17% YoY was outpaced by takaful service expenses growth of 22%, largely driven by higher claims incurred. A change in the carrying amount of takaful contracts also led to higher net takaful financial results of MYR25.4m, up from MYR1.4m in 1Q22. Despite this, investment results doubled YoY on the absence of large marked-to- market losses and greater profit income from fixed income investments.

• General fund. Takaful revenue surged 25% on the back of stronger contributions from the fire and motor businesses. Higher claims and amortisation of takaful acquisition cash flow led to a 25% rise in takaful service revenue. Investment results grew 70%, again due to greater profit income from fixed income investments.

• Forecasts and TP. We keep our forecasts for now, but will update our model post results season to factor in the MFRS17 adjustments. Our GGM- derived TP is lowered to MYR3.90, as we remove the previous 2% ESG premium ascribed given STMB’s new ESG score of 3.0 (from 3.1). Key downside risks include weaker-than-expected sales, higher-than-expected claims, and weaker-than-expected investment returns.

• ESG framework update. As there is greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023