We maintain our BUY recommendation on STMB based on 12x FY13 EPS. While the group’s prospects are clouded by regulatory uncertainties and the changing insurance and takaful industry landscape, we are comfortable with the company's business strategy, market leadership and ample surplus reserves which will help cushion adverse impact resulting from the said risks. We also reiterate our view that STMB is poised to be a good dividend stock. Our FV translates into a 2.3x FY13 BV, which is at a slight premium to the recent P/BV of M&A transactions at 2.2x.
Strong edge in a fast growing industry. STMB remains our Top Buy within the insurance sector for its unique branding and it being the only listed entity with exposure to the fast-growing takaful industry. The group’s business is expected to continue to grow in line with the takaful industry’s estimated 20%, outpacing the growth of conventional insurance premiums. Any sensitivity to regulatory risks and competition will impact the smaller takaful peers which lack the track record and the reserve funds necessary to progress further in this market. With almost 30 years of operating history and the solid backing of its substantial shareholders BIMB and EPF, STMB has accumulated ample surplus that can act as a buffer against industry-wide risks.
Strong edge in a fast growing industry. STMB remains our Top Buy within the insurance sector for its unique branding and it being the only listed entity with exposure to the fast-growing takaful industry. The group’s business is expected to continue to grow in line with the takaful industry’s estimated 20%, outpacing the growth of conventional insurance premiums. Any sensitivity to regulatory risks and competition will impact the smaller takaful peers which lack the track record and the reserve funds necessary to progress further in this market. With almost 30 years of operating history and the solid backing of its substantial shareholders BIMB and EPF, STMB has accumulated ample surplus that can act as a buffer against industry-wide risks.
Solidifying distribution to sustain business growth. STMB has seen its family takaful premiums and group products benefited greatly from bancatakaful tie-ups with several financial institutions. While we believe bancatakaful will continue to be the main driver of growth, STMB’s efforts to cement tie-ups with its partners have enabled it to identify its corporate/retail agents as a vital area of growth, in line with the growing consumer awareness of the benefits of takaful products, as well as plans to grow its agency force by about 60% next year.
Attractive dividend yield. STMB recently announced a second interim single tier dividend of 10 sen per share, bringing its YTD dividend to 25 sen per share or 4.6% dividend yield based on the stock's last price. This is a strong testimony of STMB's capitalization strength and ample reserves, as the dividend paid by banks and insurers are not only subject to board approval but also require Bank Negara Malaysia's approval. We reiterate our view that STMB is able to maintain its dividend track record moving forward, thus rendering it a stock with potentially good dividend yield.
Key risks. The risks to STMB's valuations are: i) it missing out on key bancatakaful agreements with established banking partners, ii) an expenses upside due to regulatory risks, iii) unexpected Malaysian Motor Insurance Pool losses that are expected to be borne by the takaful industry in 2013, iv) competitive threats to STMB's dominant market share in group product offerings (wakalah credit, Mortgage Reducing Term Takaful), and v) its overseas joint venture in Indonesia incurring higher than expected losses.
Source: OSK
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