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This article first appeared in The Edge Financial Daily on November 20, 2019

Syarikat Takaful Malaysia Keluarga Bhd
(Nov 19, RM6.05)
Maintain buy with a lower target price (TP) of RM7.80:
We expect a weaker outlook for the overall insurance and takaful industry for 2020 and 2021, largely driven by a potential moderation in economic growth. We foresee some downside risks from lower vehicle sales, a weak housing market and high medical and motor claims costs, likely more pronounced in 2020 and 2021. Likewise, we expect more modest earnings growth of 4.3% and 7.5% year-on-year (y-o-y) for Syarikat Takaful Malaysia Keluarga Bhd (STMK) for financial year 2020 (FY20)-FY21, from our previous forecasts of 10%-15%.

 

Meanwhile, we believe STMK will stay resilient, underpinned by its competitive edge as the preferred takaful partner, its lower-than-industry claims ratio, a shift towards Islamic banking and a successful online market penetration. Despite cutting our FY20 and FY21 net earnings estimates by 5.4% to 11.8%, STMK remains our sector preferred pick. Our “buy” call is maintained with a revised TP of RM7.80.

Malaysia’s general takaful industry grew a robust 16.4% y-o-y in gross earned contributions for the first half of 2019, and the family takaful industry grew 29.6% y-o-y based on new business contributions. However, we expect the robust growth to moderate in 2020 and 2021, due to a weaker economic growth outlook — our 2020 gross domestic product growth forecast is 4.5% versus 4.7% in our 2019 estimate.

Based on feedback we obtained from STMK, the management is expecting a more normalised gross earned contribution growth for the fourth quarter of financial year 2019 (4QFY19) as there are no new banca partners signed up year-to-date 2019. The upbeat earnings for 3QFY19 may likely moderate in 4QFY19 as mortgage drawdowns by Lembaga Pembiayaan Perumahan Sektor Awam, a civil servants’ mortgage provider, are usually slower in 4Q; the four preferred banca partners have met key performance indicators of credit takaful sales in 2019; and we expect a slowdown in passenger car sales. That said, we do not think these factors are an indication of a sharp slowdown in STMK’s earnings outlook.

Notwithstanding a more challenging market and industry headwinds, we believe STMK, with prudent underwriting policies, gives investors some comfort given the management’s good execution in the takaful business. We reiterate our “buy” rating, though we revise our 12-month TP to RM7.80, from RM8.40, based on a price-to-book value target multiple of 4.46 times, after earnings estimate revisions of -5.4% for FY20 and -11.8% for FY21. Downside risks are higher claims, a weaker premium growth and fraud cases. — Affin Hwang Capital, Nov 19

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