Post-MFRS 17, TAKAFUL’s 1QFY23 net profit of RM93.9m (+22%) was within expectations. TAKAFUL’s credit-related products remain highly relevant, further propelled by effective Bancatakaful partnerships. Its relatively low exposure in fire and motor class insurances cushions headwinds from the pending detariffication of that space. Adjusting our model to the new accounting standard and rebasing our benchmark discount, our TP for TAKAFUL is lowered to RM3.90 (from RM4.15). Maintain OUTPERFORM.

1QFY23 within expectations as compared to previous accounting standards. 1QFY23 net profit of RM93.9m made up 26% each of our full-year forecast and consensus full-year estimate based on MFRS 4 accounting standards.

Effective 1 Jan 2023, the group has applied the new MFRS 17-Insurance Contracts standard to replace MFRS 4 which uniformly distributes revenue recognition of takaful and retakaful contracts but also changes accounting presentations, such as the removal of “net earned premiums” for “takaful service result”. Comparing these standards, we note that a re stated 1QFY22 saw the following changes: (i) net profit reduced by 11.1%, (ii) ROE enhanced by 2.5ppts, and (iii) historical BVPS narrowing by 30%.

YoY, 1QFY23 takaful revenue rose by 17% thanks to higher demand for both Family (from an increase in coverage) and General Takaful products (from greater fire and motor class business). However, takaful service results declined by 19% as claims saw a group-wide increase, with service expense margin creeping to 95.1% (+3.6ppts). On the flipside, net investment income doubled from fixed income gains and lower fair value loses. Overall, this mitigated a higher net financial cost and translated to a 1QFY23 net profit growth to RM93.9m (+22%).

Outlook. The group appears to be enjoying healthy traction thanks to its sustained Bancatakaful portfolio helming its key credit-related products. The group had also ventured into other segments (i.e. employee benefits, medical) to boost its offerings. On the flipside, the pending further detariffication on fire and motor class insurance in 2HFY23 may stir price competitions within the space. That said, the group faces a lower exposure for these insurance classes, which makes up <30% of topline contributions as opposed to peers with up to <65% total dependency.

Forecasts. Post results, we transition our model inputs to reflect the new MFRS 17 requirements. This resulted in 10%/9% cut in reported earnings for FY23F/FY24F. We anticipate the demand for takaful products to sustain but higher claims may dampen profitability. The group may instead see stronger earnings contribution from its recovering investment portfolio.

Maintain OUTPERFORM with a lower TP of RM3.90 (from RM4.15). We had previously applied hypothetical adjustments to our pre-MFRS 17 model on a 2.5x FY24F PBV, being a 30% discount from a leading peer. Given the peer also saw valuations tightened amidst uncertainties arising from MFRS 17, our same 30% discount translates to a 1.9x PBV on an adjusted FY24F BVPS of RM2.05.

Despite possible reservations for the stock, we believe TAKAFUL offers a distinctive opportunity to tap into the growing shariah market. Meanwhile, its industry leading ROEs could act as buffers against possibly intensifying market conditions. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) lower premium underwritten, (ii) higher-than-expected claims incurred, (iii) higher-than-expected management expense ratio, and (iv) further wave of pandemic.

Source: Kenanga Research - 1 Jun 2023