This article first appeared in The Edge Financial Daily on July 18, 2017 - July 24, 2017
Syarikat Takaful Malaysia Bhd
(July 17, RM4)
Maintain buy recommendation with a higher target price (TP) of RM4.90: We visited Syarikat Takaful Malaysia Bhd to learn about recent developments of the company. Pursuant to the meeting, we gathered that the management was taking a proactive approach in light of the second phase of motor liberalisation.
The management expressed its optimism to seeing more underwriting activities in the motor segment. With 45% exposure in the general takaful business, the management estimates that contribution from this segment will continue its upward trend, outperforming the conventional insurance business’ flattish trajectory.
While the management understands the impact of motor detarriffing (stiff price war and compressed margins), it will maintain the 15% cashback campaign, given that it is a unique, competitive proposition to potential customers.
Additionally, the company is not overly concerned with the sustainability of this campaign. This stems from its strong underwriting fundamentals and unique takaful mechanism compared to conventional insurers, plus its consistent surplus/profit in the Takaful fund every year.
Given the continuation of this campaign, we are optimistic that the group will be able to sustain growth of its motor insurance segment. In addition, we note that other insurance companies are scaling back on this segment, which we believe would leave room for the group to expand its market share.
The management is putting more focus in reducing its overall cost of the business. Few initiatives have been set up to expedite the claims process and the management has adopted a cost-efficient distribution channel, which will primarily be supported by the company’s digital strategy. However, we do not foresee the impact to be immediate, but will most likely be in the next two to three years.
We maintain our earnings forecasts at this juncture. We note that the impact of detarriffing will be minimal given the premium band placed by Bank Negara Malaysia.
It is worth taking note that some downside risks may pose a negative surprise in earnings. These include a higher-than-expected claims ratio; lower than expected underwriting profit coming from a stiff price war and; a higher than expected combined ratio, especially from the motor segment.
Our TP adjustment stems from our optimism in seeing a higher contribution from the overall takaful business. This is premised on the opportunities for the takaful business to grow further on the back of a low penetration rate in the insurance market, promising growth of Islamic finance and a positive outlook for the local economic performance for the rest of the year. — MIDF Research, July 17