Investment Highlights

• We maintain BUY on Syarikat Takaful Malaysia Keluarga (STMK) with an unchanged fair value of RM4.80/share pegging the stock to FY24F P/BV of 2.2x supported by a ROE of 21.5%.

• No changes to our neutral 3-star ESG rating.

• 9M23 core earnings of RM277mil was above our expectation, accounting for 83.7% of our full-year estimate while making up 77% of street projection. The variance to our estimate was due to a stronger than expected investment income. Hence, we raised our FY23F earnings by 10.9% to account for a higher investment return.

• STMK’s 9M23 core earnings rose by 28.2% YoY, supported by higher net investment income from lower fair value losses and increase in profit from fixed income investments which offset a decline in takaful service result.

• Takaful service results were lower by 11.4% YoY to RM145mil in 9M23, contributed by increase in takaful service expenses despite takaful revenue rising 20.8% YoY, supported partly by higher income contribution from the general takaful business. Expenses climb was attributed to higher claims from family and general takaful (mainly motor and fire) coupled with higher amortisation of acquisition cash flows for wakalah fees.

• On QoQ basis, 3Q23 net profit after tax of RM91mil was subdued (-0.8%). Lower takaful revenue from a decline in recovery of takaful acquisition cashflows and release of contractual service margin (CSM), higher takaful service and net takaful finance expenses were offset by an increase in investment income. Net realised and fair value gains were higher QoQ.

• In 9M23, the release of contractual service margin (CSM) as takaful revenue more than doubled YoY to RM173.5mil. Year-to-date, the group’s CSM increased by RM76mil or 6.1% to RM1.3bil. This was supported by a new business value of RM220mil, driven largely by new bancatakaful business.

• The group secured new 5-year bancatakaful partnerships with Agrobank and Bank Muamalat. Besides, STMK has renewed its bancatakaful partnership arrangements with Affin Islamic Bank and Bank Rakyat for another 5 years.

• We expect the new bancatakaful partnerships with Agrobank and Bank Muamalat as well as successful retention of existing key partners, Affin Islamic Bank and Bank Rakyat, to gradually increase takaful revenue moving forward.

• The increase of the group’s net reinsurance expense to RM163mil in 9M23 vs. net income of RM30mil in 9M22 was in tandem with the growth of its new business as reflected by the increase in takaful revenue.

• The group’s total investment income climbed 55.7% YoY to RM393mil in 9M23. This was largely contributed by higher profit income from fixed income investments and lower fair value loss for the family takaful business. Additionally, general takaful business recorded a higher profit income from fixed income securities.

• No dividends were declared in the quarter.

• The stock is trading at an attractive FY24F P/BV of 1.7x with a decent dividend yield of 4.7%.

Source: AmInvest Research - 24 Nov 2023