This article first appeared in The Edge Financial Daily on October 4, 2019

Syarikat Takaful Malaysia Keluarga Bhd
(Oct 3, RM6)
Maintain hold with an unchanged target price (TP) of RM6.30: We met the management last week to obtain some operational updates. Overall, the outlook for Syarikat Takaful Malaysia Keluarga Bhd (STMB) remains mixed, in our opinion.

To our positive surprise, STMB has secured AEON Credit Service (M) Bhd as another preferred bancatakaful partner in August, bringing the total tie-up under this model to seven. Similar to the arrangement made with Bank Rakyat last year, this is expected to boost its credit-related product sales (riding mainly on Islamic personal financing) in the family segment. Based on the management’s broad-level guidance, we estimate that AEON Credit could potentially add an additional RM15 million to RM20 million per quarter to the gross earned contribution (immaterial at less than 5% of top line).

The preferred partnership with RHB Islamic Bank is due for expiration next year and we gathered that STMB is still negotiating for an extension. We believe there is a strong possibility of renewal since RHB Islamic does not have its own takaful unit to carry out the business. Although FWD Takaful has been pushing hard on marketing activities recently (in attempt to steal market share away from peers), STMB is unperturbed given that: i) FWD’s digital strategy for its distribution channel and product offering has not proven to be able to take off strongly in other operating countries like Indonesia; ii) their small agency force is not a threat as the family takaful business demands high interaction with customers in order to be successful; and iii) without a general takaful licence, it does not have cross-selling opportunities.

Personnel cost is expected to inch up faster on the back of more hiring to lift regular premium investment-linked product sales — part of the strategy to reduce overreliance on single premium credit-related products (which accounts for more than 90% of its family takaful business), ahead of the implementation of Malaysian Financial Reporting Standards 17 in 2022. For starters, STMB will first leverage the network of its preferred bancatakaful partners to control cost from rising too quickly.

We leave our forecasts unchanged as: i) the new income stream from AEON Credit is not expected to be material; ii) tie-up renewal with RHB Islamic was already taken into account; and iii) we did not factor in further management expense ratio improvement. We retain “hold” and our TP of RM6.30, based on 3.69 times FY20 price-to-book ratio with assumptions of a 29.3% return on equity (ROE), 10.1% cost of equity and 3% long-term-growth. This is above its five-year mean of 3.59 times and the sector’s 2.29 times. The premium is fair, considering: i) it is one of the leaders in the Islamic insurance industry; ii) it is the only pure listed takaful operator on Bursa Malaysia; and iii) it generates a strong ROE (13 percentage points over the industry average). — Hong Leong Investment Bank Research, Oct 2