TAKAFUL (FV RM4.60- BUY) 1QFY12 Results Review: Wakalah Fees Lift Profit

Syarikat Takaful Malaysia (Syarikat  Takaful)’s  1QFY12 annualized core earnings took off strongly, accounting for 161.8% of our forecast. This was underpinned by higher surplus transfers from its family takaful business and higher wakalah fees. The group adopted the Malaysian Financial Reporting Standard (MFRS) framework for the first time in the reporting quarter. While its prospects seem promising, we opt to be conservative in our estimates. Nonetheless, we are raising our fair value to RM4.60 as we  tweak up  our FY13 earnings forecast by 4.2%, pegged to a modest 10x FY13 EPS. Maintain BUY.

Strong  take-off.  Syarikat Takaful’s annualized 1QFY12 core net profit  beat  our expectations, accounting for 161.8% of our forecast, underpinned by higher surplus transfers from its family takaful business and higher wakalah fees. Gross contributions in the  family takaful business  surged  101.2% y-o-y while that  in the  general takaful segment  shrank 0.9% y-o-y. The surplus transfer in the family takaful business  soared 69.5% q-o-q and 100.8% y-o-y due to better underwriting results and higher investment income while  that  for its general takaful business  slipped 35.7% y-o-y due to higher claims provisioning arising from the change in incurred but not recorded (IBNR) claims reserve methodology. We expect group’s wakalah fees, which made up 114.4% of our annualized forecast, to remain robust as it continues to sell more of these products.

Adopting MFRS1 for the first time. Syarikat Takaful adopted the Malaysian Financial Reporting Standard (MFRS) framework for the first time during the quarter under review. In tandem with the new standard, it changed its reserving methodology in accordance with  Bank Negara Malaysia’s guidelines. The end-result is, we had to remove  about RM4.7m in profits in computing the group’s core net profit.

Raising earnings forecasts. We are  revisiting our earnings forecast and tweaking our estimates, which  resulted in our FY12 and FY13 numbers rising  by 7.5% and 4.2% respectively. We have reduced our surplus transfer forecast for  the  general takaful business but increased our forecast for the family takaful segment. Also, we are raising our wakalah fee income forecast for the group’s family takaful business by some 5.4% as we think that it may roll out more family takaful products moving forward.

Maintain BUY. All in all, we are reiterating our BUY recommendation on the stock, with a higher fair value of RM4.60, pegged to a modest 10x FY13 PER.  The key rerating catalysts are:  (i) a sharp improvement in underwriting margin, (ii) higher-than-expected premium growth, (iii) lower-than expected management expenses, and (iv) faster-thanexpected growth in its retail business.

Source: OSK