Maintain outperform with an unchanged target price of RM 4.85: We came away from a recent meeting with the management feeling reassured of Syarikat Takaful Malaysia Keluarga Bhd’s medium-term prospects. Although the near-term outlook appears to be clouded by industry-wide competition and the upcoming 2019 tariff review, the group’s leading market position, coupled with expanding distribution channels and digital initiatives, could sustain its performance. The group also benefits from the strengthening of the local Islamic banking industry.
In the recent nine months of financial year 2018 (9MFY18), Takaful Malaysia’s gross earned contributions (GEC) increased by 20% in both the family and general takaful segments. The management attributes this to gains in market share, driven by a solid and growing bancassurance reach, as well as better reception for the group’s motor insurance products and family takaful offerings (that is, credit-related and medical). Sustained efforts will be in place to enlarge the group’s bancassurance base, but growth from this could see pressures from the growing competition among the insurers who are also spreading their exposure against the detariffication-grieved motor class insurance.
To recap, fire insurance classes are due to be reviewed by Bank Negara, and are to be liberated in 2019. This is intended to permit fire insurances to be offered at more affordable rates at the insurers expense, of which this class is known to have a higher degree of profitability than others. To compete within the intensifying landscape, the group is looking towards its strong agency force in sustaining its fire and motor insurance profiles. Capitalising on its leading position and resources, the group aims to provide greater differentiation in products and services provided (for example, employee-based coverage and investment-linked products). On other fronts, the group strives to expand its online distribution channels, which could allow for better cost-efficiency. This should also support the group’s principal credit-related business, which has been attributed as a key growth driver.
We believe the group is poised to benefit from macroeconomic developments, such as increasing medical costs to pressurise early insurance subscription and national efforts to improve the Islamic banking share could translate into higher adoption for takaful products.
There were no surprises from Budget 2019. In the budget announcement last Friday, the government described initiatives to increase the adoption of insurance and takaful protection especially among the B40 segment of the population. Insurance peer Great Eastern has undertaken to provide a RM2 billion seed funding in executing this exercise. We believe this could provide the insurer a head-start in the provision of coverage towards this segment. Nevertheless, we do not believe that this will shrink Takaful Malaysia’s potential market share as the group is not active within this segment. The group caters widely to the middle income and above population bracket where more sustainable operating margins are present.
Our valuation is based on unchanged FY19 estimate (FY19E) earnings per share of 31.1 sen and book value per share of RM1.28 from the resulting adjustments. Our blended FY19E PER/PBV ratio is at 15 times/3.9 times which is pegged against their respective three-year forward averages. The stock commands a superior FY18E return on equity of 30% against the industry average of 20%. Furthermore, better dividend yields of around 4.5% against the industry average of 3.5% could make the stock an attractive pick against other insurance players in the market. Risks to our call include: i) lower premiums underwritten; ii) higher-than-expected claims incurred; and iii) higher-than-expected management expense ratio. — Kenanga Research, Nov 7