Takaful Malaysia’s Q1 earnings above forecast

In a filing with Bursa Malaysia yesterday, Takaful Malaysia said the family takaful business generated gross earned contributions of RM1.61bil for FY18, a 27% increase against the RM1.26bil in the previous corresponding period.

KUALA LUMPUR: Syarikat Takaful Malaysia’s (STM) 1Q18 net profit was above expectations, accounting for 32% of CIMB Equities Research’s full-year forecast and the Bloomberg consensus estimate. 

The research house said on Wednesday the variance to its forecasts mainly came from lower-than-expected management expenses and tax rates (18% in 1Q18 vs. its previous forecast of 24% for FY18). 

STM’s 1Q18 net profit surged by 22.5% on-year (and 25.1% on-quarter) as the growth in the net contributions (akin to premiums for conventional insurance) of 6.6% on-year was ahead of the 2% on-year increase in management expenses. 

Another earnings catalyst in 1Q18 was the lower tax rate of 18% in 1Q18 vs. 21.6% in 1Q17.  

STM registered a growth of 7.6% on-year in the 1Q18 gross earned contributions (GEC). This mainly came from the explosive 27.2% on-year surge in the general takaful (GT) GEC. 

“We believe that the catalysts for this were: 1) the strong growth in the motor takaful contributions generated from digital channels, and 2) expansion of its sales force to push for growth in this segment,” it said. 

CIMB Research pointed out that following the swift expansion, GT GEC accounted for 36% of the company’s total GEC in 1Q18, up from 30.5% in 1Q17.  

In contrast, despite the research house’s high expectations for the growth of its family takaful (FT) business, FT GEC contracted by 1% on-year in 1Q18. 

“We think that this was mainly dragged down by the corporate business which has seen a spike in rate competition, according to the company. 

“The company could have deliberately slowed down the expansion in this area to avoid the keen competition,” said CIMB Research.   

The research house raised its FY18-20F EPS forecasts by circa 5.3% as it cut its assumed tax rate from 24% to 20%, taking the cue from the lower tax rate of 18% in 1Q18. 

“This lifts our dividend discount model-based target price from RM4 to RM4.17. 

“We retain our Add call on STM, premised on the swift expansion in the general takaful contributions and its strong return on equity of 24%-27% in FY18-20F, one of the highest among the financial services companies in Malaysia. 

“The valuation has become more attractive as the FY19F P/E fell from 14.4 times a year ago to 10.8 times now. The downside risk to our call is a slowdown in the growth for general and family takaful contributions,” it said.