Takaful Malaysia’s earnings growth to moderate in 2H

MIDF says the earnings growth rate is expected to taper off to a lower level due to a high base effect


EARNINGS growth for Syarikat Takaful Malaysia Keluarga Bhd is expected to moderate in the second half of the year (2H19), despite having a robust performance in the 1H19, analysts said.

MIDF Research in a research note last Friday stated that Takaful Malaysia’s 1H19 earnings came in within expectations, accounting for a 52.3% and 48.3% of their and consensus’ full-year estimates respectively.

“It was not a surprise that it grew 47.3% year-on-year (YoY) to RM80.9 million, riding on its strong bancassurance partnerships and digital initiatives.

“The strong earnings growth was attributable to higher net wakalah fee income arising mainly from continued double-digit growth in the family segment,” the research house noted.

MIDF added that the earnings growth rate pace is expected to taper off to a lower level in 2H due to a high base effect.

“To recall, Takaful Malaysia’s earnings growth for 2H18 was primarily spurred by the (then) new bancassurance partnership with Bank Rakyat to boost its credit-related products sales.

“Thus, we are of the view the normalisation of the earnings growth might be warranted since it would be coming from a higher base,” it stated.

It added that a potential further liberalisation of the motor and fire insurance business in the 2H would have a dampening effect on Takaful Malaysia’s general insurance segment as well.

MIDF noted that the insurer’s fundamentals remain intact, but recent rally resulted in steep valuation and modest dividend yield.

“Takaful Malaysia’s 1H gross earned contribution jumped 31.6% YoY to RM1.33 billion, arising predominantly from its family takaful business which has increased by 44% YoY to RM967.5 million.

“This is primarily due to the higher sales from the credit-related products. Meanwhile, the net claims declined marginally by 2.1% YoY to RM476.4 million, attributable to lower claims (-11 YoY) from the general insurance segment, but partially moderated by the slight increase in net claims of 1% YoY at the family takaful segment.

“Thus, these have mainly contributed to the improved combined ratio to 69.1% (-16.2ppts YoY) and led to a higher underwriting margin of 30.9% (+16.2ppts YoY),” the research house said.

MIDF has downgraded its stance on Takaful Malaysia to ‘Neutral’ from ‘Buy’ previously, but maintained its target price (TP) of RM6.60 pegged to financial year 2020 diluted earnings per share (EPS) and price-earnings (PE) multiple of 14 times (two year historical average).

The research outfit noted that while the fundamental aspect of Takaful Malaysia remains on track, the above developments have mostly been priced in into the stock price as reflected by the recent run-up of the company’s share price.

“The valuation of the company has become steep as evident from its current PE of 15.7 times, which is way above its two-year historical trading PE of 14.4 times,” the research house said.

MIDF noted that the dividend yield of the company is also losing its appeal at only 2.2% and added that the potential further detariffication of the motor and fire insurance in 2H will present a less optimistic outlook on its general insurance segment.

“This segment alone contributes 30% to its group’s gross earned contribution. Coming from a higher base, we are also of the view that earnings growth rate would possibly be tapered in 2H19 on a YoY basis as part of the normalisation effect,” the research house said.

Meanwhile, Affin Hwang Capital has maintained its ‘Buy’ stance on the insurer with the TP of RM8.40, based on 2020 valuation horizon (on a 4.75 times P/BV target) from RM8.30 TP earlier (on a 5.6 times P/BV target).

Affin Hwang noted that it was taken aback by the lower wakalah fee earned in the second quarter (2Q19), primarily due to lower gross earned contribution and the requirement for higher actuarial reserves.

“Otherwise, Takaful Malaysia continues to report robust operating results — 1H gross earned contribution rose 31.6% YoY (family +43.5% YoY, general +8.1% YoY) and 1H19 net claims ratio improved to 42.5% from 57% in 1H18.

“As the management’s strategy is on improving profitability and returns in 2H, we anticipate lower exposure in the higher-claim employee-benefit and motor segments, hence a slower topline growth, but overall claims experience is expected to improve,” the research firm said.

Takaful Malaysia’s net profit for the 2Q ended June 30, 2019, jumped 60.5% YoY to RM80.9 million on the back of higher net wakalah fee income.

In an exchange filing last Thursday, the insurer noted that its revenue rose by 24% YoY to RM672.98 million on higher sales generated by its family takaful business.

For the quarter under review, family takaful business recorded gross earned contributions of RM464.6 million on higher sales from credit-related products. Meanwhile, its general Takaful business generated gross earned contributions of RM166.2 million, an increase of 4%, mainly from the fire and motor classes.

Overall, the insurance company stated that its family takaful business generated gross earned contributions of RM967.5 million, an increase of 43.5%, for the six-month period ended June 30, 2019, compared to a year ago, on higher sales from credit-related products.

Meanwhile, its general takaful business generated gross earned contributions of RM370.4 million, an increase of 8%, for the six-month period ended June 30, 2019, compared to a year ago, mainly from the fire and motor classes.

It expects the takaful industry to outperform the conventional insurers on strong demand and added it is poised to further expand its market share this year.

To support business growth and customer centricity, the company will continue its digital strategy to build the full digital ecosystem and to expand the business focus beyond credit-related business to reach out to the wide retail customer base of major partner banks.