This article first appeared in The Edge Financial Daily on April 27, 2017 - May 3, 2017

Syarikat Takaful Malaysia Bhd
(April 26, RM4.01)
Maintain add with a target price (TP) of RM4.52: Although Syarikat Takaful Malaysia Bhd’s (STM) first quarter ended March 31, 2017 (1QFY17) net profit accounted for 30% of our full-year forecasts and 29% of Bloomberg consensus estimates, we regard the 1QFY17 results as in line with expectations.

This is because we expect weaker earnings in the coming quarters, premised on the management’s guidance for slower growth in family takaful contributions (akin to premiums for conventional insurance), and additional costs for the licence split.

STM’s 1QFY17 net profit jumped 22.4% year-on-year (y-o-y) (up 46.4% quarter-on-quarter [q-o-q] to RM56.8 million, underpinned by a 10.2% y-o-y increase in gross earned contributions (GEC), a 25.2% y-o-y surge in other income at the holding-company level, and a drop in other operating expenses. 

The company recorded a healthy growth of 10.2% y-o-y (up 5.2% q-o-q) in GEC in 1QFY17. This was mainly driven by the family takaful unit, which posted a strong expansion of 13.3% y-o-y in 1QFY17 GEC.

Meanwhile, general takaful GEC only rose 3.8% y-o-y in 1QFY17, which was close to the expected growth rate of 3% to 4% for the industry.

Family takaful business accounted for 69.5% of STM’s 1QFY17 GEC with the remaining 30.5% coming from the general takaful business.

Total costs increased by only 3.5% y-o-y in 1QFY17, narrower than the top-line expansion. Management expense jumped by 29.6% y-o-y in 1QFY17 as the company incurred additional costs to sustain the strong top-line growth, in our view.

However, this was partly offset by the 25.8% y-o-y drop in other operating expenses. 

We retain our financial year ending Dec 31, 2017 (FY17) to FY19 earnings per share (EPS) forecasts and dividend discount model (DDM)-based TP of RM4.52. The spectacular net profit growth in 1QFY17 reinforces our “add” call on the stock. Rerating catalysts are positive growth prospects in the takaful market and its strong return on equity of 23% to 25%.

The downside risks to our call are a drastic slowdown in the growth in contributions due to weaker expansion in the industry and heightened competition. — CIMB Investment Bank Bhd, April 26