• Maintain BUY, new MYR4.40 TP from MYR4.30, c.4% FY24F yield. Syarikat Takaful Malaysia Keluarga’s FY23 results showed a solid 23% YoY growth in net profit, but contractual service margin (CSM) movements point towards a potential revenue slowdown in FY24. However, sustained investment returns and lower retakaful expenses should continue to support STMB’s strong bottomline momentum.

• Group results review. STMB’s 4Q23 net profit of MYR70.3m (+5% YoY, -23% QoQ) brought the full-year total to MYR346.9m (+23% YoY), broadly in line with ours and consensus’ estimates. Underwriting results for the full year were marred by higher retakaful expenses (MYR197m in FY23 vs MYR3m in FY22) related to the flood incident in Dec 2021. However, the bottomline was lifted by much improved investment income (+36% YoY). On a quarterly basis, 4Q23 saw revenue surge 55% QoQ (YoY: +4%), though offset by higher claims (+9% QoQ, -19% YoY) and acquisition costs (>100% QoQ and YoY). A DPS of 14 sen – likely the sole one for FY23 – declared in Dec 2023 represents a 34% payout on the full-year numbers.

• Strong takaful revenue growth in FY23. STMB’s takaful revenue of MYR2.9bn in FY23 was a 14% YoY growth, and would likely have been a record high against previous years. Growth came predominantly from the General fund (+26% YoY), driven by greater sales of motor and fire takaful products. On the Family side, growth was a slower 3% YoY likely due to lower-yielding takaful contracts.

• Takaful expenses – what was the driver? STMB’s claims management shone in the FY23 numbers, with the claims ratio dropping to 68% from 78% in FY22. However, directly attributable expenses and wakalah fees rose 59% YoY. We understand this was due to greater acquisition costs for general takaful contracts, as well as higher profits attributable to takaful contract participants. We reckon both are here to stay, though our present forecasts already bake in fairly conservative expense/wakalah fee ratios.

• Resilient amid topline slowdown in FY24. In FY24, we think both the Family and General funds could experience slower takaful sales, given the high base effect and the expected slowdowns in demand for mortgages and new cars. This is also evident in STMB’s contractual service margin (CSM), which shrunk 2% YoY on the back of softer new business value booked (-14% YoY). However, we think strong investment returns can still be sustained, and together with easing retakaful expenses, should support double-digit bottomline growth in FY24.

• Forecasts raised by 2-3% as we assume better investment returns, albeit still fairly conservative. Our TP rises to MYR4.40 from MYR4.30, inclusive of zero ESG premium. Reiterate BUY on STMB on sustained bottomline momentum and undemanding valuations.

Source: RHB Research - 27 Feb 2024