This article first appeared in The Edge Financial Daily, on April 21, 2016.
Syarikat Takaful Malaysia Bhd
(April 20, RM4.06)
Maintain add call with an unchanged target price (TP) of RM4.54. Syarikat Takaful Malaysia Bhd (STM)’s first financial quarter ended March 31, 2016 (1QFY16) net profit was in line with our expectations, accounting for 24% of our full-year forecast.
However, it was ahead of street estimates at 27% of the consensus number. There was no dividend declared in 1QFY16, as expected. We maintain our earnings per share forecasts and dividend discount model-based TP (based on cost of equity of 10% and terminal growth rate of 4%).
The positive takeaway from the 1QFY16 results was a swift expansion of 14.4% year-on-year (y-o-y) in gross earned contributions (GEC) to RM426.8 million.
This emanated primarily from its family takaful unit, which chalked up a spectacular growth of 21.8% y-o-y in its 1QFY16 GEC (mainly from mortgage-related products).
Meanwhile, the GEC for the general takaful business inched up only 1.4% y-o-y in 1QFY16 (mainly from commercial classes).
Nevertheless, expenses also surged in 1QFY16 at the takaful operator level — by 13.5% y-o-y for management expenses, 234.4% y-o-y for expense reserve, and 18.8% y-o-y for other operating expenses.
This capped net profit growth to 0.2% y-o-y in 1QFY16, despite the strong top-line expansion.
We think the high expense reserve would not be a recurring item in the coming quarters, given the account’s highly volatile trend. In fact, STM recorded a net write-back of RM300,000 in expense reserve in FY15.
The family takaful unit contributed a substantial 67.6% of STM’s total GEC in 1QFY16, with the remaining 32.4% coming from the general takaful business.
Due to weaker investment income, both divisions recorded declines in surplus transfer in 1QFY16, by 35% y-o-y to RM14.1 million for the family takaful business, and by 13.6% y-o-y to RM5.7 million for the general takaful operations.
We still rate STM an add, given the potential rerating catalysts of exposure to the swift-expanding takaful market, and high return on equity of 25%-26% in FY15-FY17.
The 14.4% y-o-y jump in 1QFY16 GEC is commendable given the generally unfavourable economic environment, and this supports our positive view for further GEC growth in the coming quarters. — CIMB Research, April 19