This article first appeared in The Edge Financial Daily on November 7, 2017

Syarikat Takaful Malaysia Bhd
(Nov 6, RM3.73)
Maintain buy with an unchanged target price of RM4.90: Asuransi Takaful Umum (ATU) is held indirectly by Syarikat Takaful Malaysia Bhd (STMB), with a 64.7% effective equity interest. 

The company is incorporated in 1994, with its principal activity in the general takaful business. Some of the products offered by ATU include protection for motor, engineering and personal accidents. Interest to acquire was made by Koperasi Simpan Pinjam Jasa for a total consideration of seven billion Indonesian rupiah (RM2.2 million).

After careful deliberation, the board has decided to accept the offer made by Koperasi Simpan Pinjam. However, it is still subject to the approval of Indonesian’s Financial Services Authority and ATU shareholders.

The proposed disposal was due to limitations and constraints, especially in terms of capital requirement. The presence of numerous takaful “Islamic window” operations in Indonesia has put full-fledged syariah-compliant operators at a significant disadvantage.

More often than not, a pure takaful operator needs to incur higher operating cost, from higher management fees in comparison with its competitors. With various limitations, coupled with the lack of technical resources and expertise, ATU is viewed to be no longer self-sustaining.

The best available option for STMB is to accept the offer from Koperasi Simpan Pinjam Jasa. We note that STMB’s indirect cost of investment in ATU is RM9.8 million. As at Sept 30, 2017, the carrying value was RM6.3 million.

The proposed disposal will not have any material financial and operational effects on STMB and its group of companies for the financial year ending Dec 31, 2017 (FY17). Despite the disposal, we do not think the exercise will justify a rerating of STMB’s FY18 earnings valuation.

This is considering that the total contribution from STMB Indonesian operations to the group’s bottom line only recorded less than 1% of total profit before zakat and taxation (PBZT).

At this juncture, ATU will continue its existing block of the business pending the approval of the proposed acquisition. In the meantime, the takaful industry in Indonesia is expected to continue experiencing challenges due to economic scenarios.

However, the group remain optimistic about enhancing its Indonesian family takaful business, operated under the name of Ansuransi Takaful Keluarga, and market share, with support from its distribution channel.

Moving forward, we view that demand for STMB’s takaful products will continue to be resilient, especially in Malaysia. This is premised on the company’s strong presence in the takaful market, especially for family takaful, with the largest market share. Taking into account the low life/takaful penetration rate of about 56.2% (versus a 75% target by 2020) and the group’s ongoing developments to upgrade customer service via its digitalisation plan, our outlook for the group remains positive. — MIDF Research, Nov 6