• Maintain BUY and MYR4.30 TP, 17% upside with c.4% FY24F yield. In this report, we look at the impact of the adoption of Malaysia Financial Reporting Standards 17 (MFRS17) on Syarikat Takaful, and introduce our MFRS17 forecasts for FY22-25 (note that FY22 numbers are based on internal estimates for now). STMB remains a sector Top Pick, due to its strong momentum in key growth indicators, and brand equity in the promising takaful industry.

• MFRS17 impact. Upon transition, STMB’s retained earnings shrank 34% to MYR1.02bn, while total equity decreased by 29%. 1H22 PATAMI was adjusted downwards by 9% to MYR142.8m. As a result, 1H22 ROE, by our estimates, stood at 21.8%, up from 16.5% under MFRS4. A contractual service margin (CSM) was established upon transition, amounting to MYR1.04bn – this is indicative of future profit inflows for the group. There is no impact on capital adequacy, as calculations are still based on the existing risk-based capital framework for now.

• 1H23 results recap. STMB recorded 1H23 net profit of MYR185.5m, up 30% YoY. While takaful revenue grew by a solid 18% YoY growth, this was brought down by higher claims incurred (+24%) and higher retakaful expenses (+34%) – the latter was due to agreements made with certain retakaful operators relating to the flood events in late 2021, and should stabilise in FY24F. Investment returns doubled due to an absence of significant marked-to-market losses, while a lower effective tax rate further lifted the bottomline. As at the latest available dates, STMB occupies the first and second spots in the family takaful and general takaful segments.

• A decent outlook in a tough environment. STMB assured us that it will revise product prices to better reflect the medical inflation experienced by hospitals and clinics. On the bright side, claims on the general takaful side appear to have stabilised to pre-pandemic levels. Moving forward, general takaful will still be the key topline driver, as the family takaful side continues to be burdened by weaker contributions from Public Sector Home Financing Board (LPPSA) – feedback from management indicates that contributions should recover in FY24F. Additionally, the strong growth of the group’s CSM (+12% YoY in 1H23) is a positive sign, and STMB has also booked in MYR136m in new business value YTD. The group also committed to paying out at least the same amount in dividends as FY22 (13.5 sen per share), indicating a c.4% yield.

• Forecasts and TP. We forecast net profit to increase at a CAGR of 14% over FY22-25. This comes from a combination of sustained investment returns, easing claims ratios, and the initial low base effect. We maintain our GGM-derived P/BV method of valuation to obtain an unchanged TP of MYR4.30. Our TP includes zero ESG premium/discount.

Source: RHB Securities Research - 27 Oct 2023