Takaful Insurance

CIMB Equities Research has initiated coverage of Syarikat Takaful Malaysia (STM) with a target price of RM4.39  and an Add recommendation. It said on Thursday STM is for investors looking for pure and direct exposure to the fast-growing takaful industry. STM is also one of the biggest players in this segment, competing with Maybank-owned Etiqa.
  

“Potential re-rating catalysts are (1) a strong three-year EPS compounded annual growth rate (CAGR) of 15.6% for FY14-17, (2) a positive industry outlook, and (3) high returns on equity  (ROE) of 20%+,” it said.  

 

STM is the only listed pure takaful operator on Bursa Malaysia. The company can be considered a composite insurer, as it is operating both family takaful (akin to life insurance) and general takaful (non-life insurance) businesses, from which it generated total contributions (premiums) of RM1.4bil in FY14. It also has a small takaful unit in Indonesia.    

 

“We believe the outlook is positive for the takaful industry due to the switch from conventional insurance to takaful products among the Muslim community and an increase take-up rate for family takaful products.

 

“In 2015, we are projecting contribution (premiums) growth of 10%-11% for the general takaful sector and 11%-14% for the family takaful sector,” it said.

 

CIMB Research forecast a three-year CAGR of 15.6% for STM’s net profit in FY14-17. This is expected to be underpinned by an 11.5% CAGR in gross earned contributions, with a CAGR of 12% for the family takaful business and 10.3% for the general takaful business.

 

For the general takaful business, it anticipated an improvement in the gross claims ratio from 72.6% in FY14 to 65% in FY15-16 and 64% in FY17. 

 

“We think that STM should trade at a premium valuation compared to its peers in Malaysia due to its (1) proposition as the only pure direct exposure to the takaful sector, (2) position as a composite insurer, (3) our projection of swift EPS growth, and (3) superior ROE of 24%-27%,” it said.