Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with an unchanged fair value of RM4.15/share, pegging the stock to FY23F P/BV of 2.4x supported by ROE of 22.0%, and factoring in the impact of FRS 17. Our valuation reflects a neutral 3-star ESG rating.

• No changes to our earnings estimates as core earnings in 1Q22 were within expectations, accounting for 23% of our and 25% of consensus estimate.

• 1Q22 core net profit after tax declined by 9% YoY to RM92mil despite higher gross written contributions (GWC) from the general and family takaful businesses.

• The drop in earnings YoY was driven by higher fair value losses of RM37mil in 1Q22 from the family takaful business due to weaker equity market performance. 1Q22 saw higher death claims for the family takaful business and the normalisation of motor claims for the general takaful business after mobility restrictions were eased. Additionally, the group’s net profit was impacted by higher sales incentives which led to a surge in administration and management expenses.

• The tax rate was higher at 28.8% in 1Q22 vs. 11.6% in 1Q21, attributed to Cukai Makmur. Also, effective from FY2022F, wakalah fees or any other fees received by the shareholder's fund in relation to the family takaful fund will be no longer be tax exempted. It will be taxed similar to the general takaful fund at 24%.

• GWC from the family takaful business rose by 7.7% YoY contributed by the increase in sales of credit-related products. This was in tandem with the faster pace of financing growth of banks after the reopening of the economy. Meanwhile, the top line for its general takaful business climbed 12% YoY, attributed to higher sales from the fire, motor and liability class of business.

• The group recorded a lower underwriting margin of 14% for 1Q22 due to higher net incurred claims. Net claims ratio climbed to 55% for 1Q22 vs. 42% in 1Q21.

• Moving ahead, the claims ratio is anticipated to improve as we expect lower claims for the family takaful business. We do not expect a repeat in backlogged submissions by banks (bancassurrance partners) for claims on deceased borrowers as seen in 1Q22. Meanwhile, for the general takaful business, we envisage motor claims to be higher in FY22F from an increase in traffic volume. Nevertheless, to mitigate soaring motor claims, the group lowered its motor contributions as a percentage of the total general takaful business’s GWC to 43% in 1Q22 vs. 51% in 4Q21.

• The group’s investment income increased by 8% YoY for 1Q22. This was largely driven by higher profit income from fixed income investments for both the family and general takaful businesses.

• The group’s Indonesian subsidiary recorded a PBT loss of RM0.8mil in 1Q22 compared to a loss of RM0.2mil in 1Q21, attributed to the marked-to-market impact on valuation of securities.

• The unallocated surplus fund for the family takaful business remained healthy at RM1.3bil while that of the general takaful business was at RM223mil.

• As at the end of March 22, foreign shareholdings of STMK stood at 9.3%.

• The stock is trading at a low 1.7x FY23 P/BV. Its valuation remains compelling with a superior ROE of 22% for FY23.

• We continue to see improving top line growth ahead, particularly on the sales of credit-related products, leveraging the stronger financing growth of banks in tandem with the economic recovery.

Source: AmInvest Research - 12 May 2022