Syarikat Takaful Malaysia (STMB MK, BUY, FV: RM4.42)

An Undervalued Gem Unearthed

Being the only pure takaful operator listed  on Bursa Malaysia,  Takaful Malaysia is trading at a cheap FY13 PER of 7.1x. Thanks to the large regional Muslim population, low family takaful penetration rate and its niche expertise, we expect the company to grow its earnings consistently moving forward. We believe its Indonesian operations offer immense potential as the family takaful penetration rate stands at only 1% of the population in a country with more than 213m Muslims. We are initiating coverage on Takaful Malaysia with a FV of RM4.42 pegged to 10x FY13 PER.

Undervalued. Takaful Malaysia is currently trading at 0.9x FY13 P/BV and 7.1x FY13 PER. We think that it deserves to trade at more than 10x forward earnings due to its consistent double-digit ROE and dividend payout. Based on our calculations, we estimate the group’s FY13 net profit at 44.2 sen per share. Hence, we value Takaful Malaysia at RM4.42 pegged to 10x FY13 EPS. Among some of the assumptions behind our earnings estimates are: (i) 20% growth in gross written contribution for both general and family takaful, (ii) stable overall claims ratio of 65-68% for both general and family takaful, and (iii) +15% growth per year in investment income.

Only operator offering 15% no claim rebate.  Presently,  Takaful Malaysia is the only takaful operator which offers a 15% no claim rebate for all its general insurance products and selected family takaful products. Essentially, policyholders stand a chance to get back 15% of their premiums at the end of each year if the fund is profitable and if they make no claims. With the launch of its ‘We Should Talk’ campaign this year, we think that  Takaful Malaysia is poised to secure more new premiums in the medium term. Positive macro outlook in Malaysia.  The takaful industry has been experiencing strong growth in Malaysia during the last decade  on the back of various government initiatives to promote the country as a global Islamic financial centre. We see tremendous potential in the life takaful business as demand for healthcare strengthens due to demographic shifts, coupled with the fact that the family takaful penetration rate was merely 10% of the population in 2010.

Initiate with BUY.  In view of the industry’s positive macro outlook, the large Muslim population in Malaysia and Indonesia as well as the company’s cheap valuation, stable dividend payout and strong balance sheet, we are initiating coverage on Takaful Malaysia with a BUY  recommendation. Our FV of RM4.42 is based on 10x FY13 PER. Key rerating catalysts include: (i) sharp improvement in underwriting margins, (ii) higher-than-expected premium growth, and (iii) lower-than-expected management expenses.

Source: OSK188