This article first appeared in The Edge Financial Daily on July 31, 2018
Syarikat Takaful Malaysia Keluarga Bhd
(July 30, RM3.95)
Maintain buy with an unchanged target price (TP) of RM4.44: Syarikat Takaful Malaysia Keluarga Bhd recorded earnings of RM50 million for the second quarter of financial year 2018 (2QFY18). The cumulative earnings in the first half of FY18 (1HFY18) came in at 52% and 53.4% of our and consensus full-year estimates. On a quarterly basis, there was a net addition of RM50 million of profit after zakat, tax, and minority interests in 2QFY18 earnings, bringing the total earnings in 1HFY18 to RM119.7 million. This marked a notable improvement of +18.3% year-on-year (y-o-y).
Overall operating revenue posted growth. Operating revenue in 1HFY18 was higher by +13% y-o-y to RM1.3 billion. This was due to the increase in income generated by both family and general takaful business attributable to higher net wakalah fee income. Notably, its general takaful business was the main growth driver, with income rising by +26% y-o-y primarily in the fire and motor classes. While the revenue trend had been encouraging, we noted that profits were largely moderated by higher net benefits and claims of +40% y-o-y. This was due to higher expenses in fire and motor classes.
Family takaful recorded decent improvement in 1HFY18. Income from family takaful was higher by +5% y-o-y in the quarter. This was driven by higher sales of credit-related products, to record gross earned contributions of RM674.1 million. In terms of net benefits and claims, it increased by +3% to RM370.7 million following the increase in surrender and medical claims. While net benefits and claims remain a risk to profitability moving forward, we are optimistic that contributions are likely to expand further, supported by the group’s marketing effort to reach wider market. Accordingly, we believe that this will be driven by its strategic initiatives in the digital space.
Combined ratio seemed stable. The cumulative total of net claims and benefits was higher in 1HFY18, increasing by +9% y-o-y to RM486.7 million from the same period last year. Despite the increase, the claims ratio declined marginally by -1.1 percentage points (ppts). This was following the higher growth in net earned contributions in the period by +11.1% y-o-y. Coupled with a flat management expenses ratio in 1HFY18, the overall group’s combined ratio showed an improvement. It declined by -2.1ppts y-o-y to record a ratio of 71.4%.
Given that results are within our expectations, we maintain our earnings forecasts at this juncture. Our positive outlook is underpinned by a stream of robust opportunities in the takaful market, including the low penetration rate of insurance or takaful coverage, and favourable demographic trend in Malaysia.
Given these market features, we have seen an encouraging growth in incomes generated since introduction. While we observed that demand has been strong due to a structural gap in the market, the group continues to expand its focus on improving its overall value chain. This will be largely supported by its long-term strategic focus of digitalisation initiatives. Moving forward, these efforts will enable the company to achieve better performance metrics including high straight through processing rates and quick turnaround time. — MIDF Research, July 30