Investment Highlights

• We maintain our BUY call on Syarikat Takaful Malaysia Keluarga (STMK) with an unchanged fair value of RM3.80/share pegging the stock to FY23F P/BV of 2.2x supported by ROE of 19.0%. No changes to our earnings estimate and neutral 3-star ESG rating.

• We met up with the management recently for updates on the group.

• There have been no changes to management’s guidance on the impact of FRS 17 since the last briefing update in June 2022.

• STMK continues to guide for 15-20% decline in profit after tax (PAT) for FY23F (year 1 adoption of the new accounting standard) compared to FY22F with an ROE of 22-25%. The decline will mainly be attributed to the recognition of unearned business profits as contractual service margin (CSM).

• Management has conservatively guided the group’s profits to normalise towards the levels before transitioning to FRS 17 within 5-6 years. Nevertheless, we see that a stronger growth in CSM from contributions of new business booked in could shorten the time frame for normalisation.

• On FRS 17, the day 1 retrospective earnings adjustment is likely to reduce FY23F retained earnings by 30-45%. Unearned profits will be carved out from retained earnings and reported as CSM. CSM will form part of the insurance and takaful operators’ (ITOs) contract liabilities.

• From the recent developments of FRS 17, we gathered that there will be a neutral impact on ITOs’ capital ratios from 2023 to 2025. This is due to the CSM being allowed to be recognised as part of the companies’ equity in the computation of their Capital Adequacy Ratios (CAR). At this point of time, it is likely that insurers will follow existing FRS 4 to compute CAR. This will be similar to the practice in Singapore. Hence, the CARs of ITOs are expected to stay above the regulatory minimum of 130% after adopting FRS 17.

• In addition, we understand that tax treatment after the adoption of FRS 17 will remain unchanged. ITOs will follow FRS 4 for tax computation despite earned premiums/contributions being required to be recognised in line with FRS 17. This will see the recognition of deferred tax asset in tandem with the amortisation of earned premium/contributions over the term of the insurance/takaful policies. FRS 4 is presently adopted by local ITOs for insurance taxation.

• Effective 1 Oct 2022, all ITOs are required to revise downwards by 15% of the tariff rates for all construction classifications of selected trade codes for fire and lightning perils and house owner/householder fire insurance/takaful. Meanwhile, fire tariff rates for the other trade codes are unchanged.

• The adjustments are likely to see ITOs increasing the sum insured/covered threshold for risk to qualify for self-rating for up to a maximum of RM100mil. The impact will be insignificant at 1-2% to STMK’s topline for FY23F.

• The group has introduced new products to cover the risk of fire, accidental, lightning and storm damage to solar panels as part of their initiatives on climate change. These products are targeted at individuals as well as the industrial and commercial segments. It offers protection for the loss or damage to solar photovoltaic (PV) systems and parts as well as providing hassle-free repairs and installations.

• Also, as an ESG initiative to reduce dumping of waste, the group is now looking at repairing windscreens for motor vehicles instead of replacing and disposing of damaged window glasses.

• The unallocated surplus funds for family were RM1.3bil while that of general takaful business remained healthy at RM216mil as at end-June 2022.

• The stock is trading at 1.9x FY23F P/BV. Its valuation remains compelling with a superior FY23F ROE of 19%. As at end at Sept 2022, foreign shareholdings of STMK remained stable at 8.9% similar to June 2022.

Source: AmInvest Research - 14 Oct 2022