This article first appeared in Capital, The Edge Malaysia Weekly on May 20, 2024 - May 26, 2024

Target price: RM4.97 BUY

MIDF Research (May 13): We initiate coverage on Syarikat Takaful Malaysia Keluarga Bhd (KL:TAKAFUL) with a “buy” recommendation and a target price (TP) of RM4.97, based on FY25F P/B value of 1.84 times. This represents an upside of 34.7% on its current price of RM3.69. In recent years, Syarikat Takaful has been trading regularly below its 10-year average of 2.37 times. Valuation weakness aligned with weaker return on equity (ROE) performance during the pandemic and skittishness over the IFRS 17 regime change. Regardless, profitability (ROE) seems to be recovering once again, prompting a valuation closer to the historical average.

Syarikat Takaful was established on Nov 29, 1984, when the government of Malaysia set up a task force to study the feasibility of establishing an Islamic insurance company in Malaysia. The incorporation of this company as the first takaful operator in the country occurred in the same year as the Takaful Act was enacted. Syarikat Takaful bears the distinction of being the first and only Takaful operator that has been consistently rewarding cashback to General Takaful customers for making no claims during the coverage period.

It serves an underpenetrated market amid macro trends. The statistics show multiple opportunities: (i) In terms of insurance spending as a percentage of gross domestic product, Malaysia lags behind its more developed Asian Organisation for Economic Co-operation and Development peers. (ii) The life insurance penetration rate of 54% in 2021 remains well below Bank Negara Malaysia’s 75% goal — with family takaful at a meagre 15%, despite a predominantly Muslim population.

As with most local takaful players, Syarikat Takaful operates under the Wakalah model (formerly operating under the Mudarabah model before switching in 2012). Under this model, Syarikat Takaful manages the takaful funds from contributions on behalf of participants and receives “wakalah” (a frontloaded service fee for the services rendered — the Mudarabah model omits this step). Wakalah is fixed according to the product type. By contributing “tabarru” (gift or donation — basically contributions from customers) to the common takaful fund, both the participants and the takaful operator will be entitled to a share of any surplus funds. This is not practised in conventional insurance.

Target price: RM3.30 BUY

RHB Research (May 15): US trade representative Katherine Tai released a list of proposed strategic sectors (up to 14) that will be subjected to tariff hikes (or new tariffs imposed for certain products) ranging from 25% to 100%. Notably, medical gloves are included with a proposed tariff hike to 25% from 7.5%, which will take effect in 2026.

While the new tariffs are expected to be effective from 2026, this may allow Chinese manufacturers to reconsider their expansion plans into overseas markets to circumvent the tariff hike. In our view, overseas expansions could make Chinese glove makers less cost competitive (as manufacturers in China use coal, a cheaper fuel than natural gas).

We raised our FY25F/FY26F earnings for Hartalega (KL:HARTA) by 3%, taking into account a higher USD/MYR exchange rate offset by a slight increase in key raw material costs. Post-earnings adjustment, our discounted cash flow-derived TP represents 33 times FY25 PER, above its pre-Covid-19 five-year mean of 27 times. Key risks include a decrease in gloves’ average selling price, slower-than-expected capacity expansion, lower-than-expected utilisation rate, and higher-than-expected raw material price.

Target price: RM1.66 BUY

AmInvestment Bank Research (May 15): Deleum’s (KL:DELEUM) 60%-owned Deleum Technology Solutions (DTS) has entered into a settlement agreement with six parties in a lawsuit filed in November 2020 involving former executives of the group and executives of key client Petronas Carigali Sdn Bhd and its subcontractors.

The settlement will involve a payment of RM834,000 to one of the executives as part of outstanding invoices; discontinuation of the lawsuit to the executives; and admission of liability by an executive with payment to DTS amounting to RM100,000. Assuming the settlement is expensed in FY24F, we expect to see a net minor -1.3% impact on the group’s prospective core net profit.

We believe this is a broadly positive move that resolves legacy issues for the group in part and serves as an indication of the direction for the existing lawsuits with the remaining involved parties.

We maintain our “buy” call on Deleum with a fair value of RM1.66 per share, pegged to a FY24F PER of 12 times — at parity to Malaysian oil and gas operators’ average. Our FV implies an unchanged neutral three-star ESG rating.

Target price: RM3.18 OUTPERFORM

Kenanga Research (May 15): We came away from an engagement with Dialog Group Bhd (KL:DIALOG) feeling positively upbeat on its earnings outlook. Broadly, the key takeaways are that its upstream will be less dominant in FY25 as Dialog anticipates a shift in segmental profit before tax contributions in FY25 and beyond, with an expected increase in the prominence of the downstream division due to improvements in project margins. In addition, its tank terminal demand is expected to remain robust while its downstream business will see further margin improvement with the completion of legacy contracts by end-FY24.

We maintain our SOP-based TP of RM3.18. We continue to like Dialog for: (i) margin recovery at its plant maintenance, engineering, procurement, construction and commissioning and specialist product businesses; (ii) earnings growth and diversification driven by forays into upstream investments, including production assets (its current portfolio of production sharing contracts includes Baram Junior Cluster, D35/D21/J4 and Concession L53/48 in Thailand); and (iii) its strong track record in project execution.

Risks to our call include prolonged and intensifying cost pressures, a delay in capacity expansion plans and reduced utilisation of tank terminals.

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