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Negative More Than Priced In

STMB’s share price has recently experienced a relatively steep correction due to factors that are largely non-fundamental and one-off in nature. Earnings have remained resilient through the pandemic. As such, current PE valuation at -2SD to its historical mean does present an excellent opportunity to accumulate the stock on weakness, on expectations of a recovery. Maintain BUY with a lower target price of RM4.80 from RM5.36 post earnings revision.

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WHATS NEW

• Short-term share price overhang. Syarikat Takaful Malaysia’s (STMB) share price has declined by roughly 14% since early-Oct 21. There were two phases in the share price correction, notably: a) share price started to decline by 7% in early to late-Oct 21 after the completion of BIMB Holdings’ (BIMB) internal reorganisation which entailed the distribution of STMB’s shares to shareholders of BIMB (equivalent to 60% of STMB’s outstanding shares), and b) a 7% decline from end-Oct 21 to current levels as it was also impacted by the one-off incremental 9ppt increase in corporate tax (Cukai Makmur) from the recent budget and removal of tax exemption on Wakalah income from Family credit-related Takaful premiums. Earnings impact from the prosperity tax and cessation of Wakalah tax incentive is estimated at 8% and 5% respectively.

• Share price weakness an opportunity to accumulate. We view STMB’s recent share price weakness as an opportunity to accumulate as we note that the above factors contributing to STMB’s recent share price weakness are non-fundamental and one-off in nature apart from the ceasing of tax exemption on Wakalah income for Family Takaful premiums. The distribution of BIMB’s stake in STMB at 60% of STMB’s outstanding shares may have created a short-term share overhang but is positive over the longer term by improving its liquidity profile. The higher corporate tax rate is one-off in nature and affects all corporates with domestic profit before tax (PBT) above RM100m and not just STMB. We note that the share price has declined by a much wider 14% over the last month vs the 5% earnings impact from the cessation of Wakalah tax incentive which is permanent in nature.

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• Manageable impact from adoption of MFRS17. There were longer-term concerns of the potential impact of MFRS17 on the group’s earnings as it would have to amortise single premium policies over a longer period and lead to lower earnings which management had guided the impact to be roughly 15%. From a share price valuation angle, the market should accord the stock a higher P/B multiple from a higher ROE as there will be a day 1 downward adjustment to retained profit for accounting modification on legacy single premium policies. As such, post MFRS17 ROE is anticipated to rise by 2-3ppts which will partially offset the earnings impact. There is also minimal risk to a cash call as its CAR ratio should remain well above 130% despite the one-off day 1 impact to retained earnings.

ESSENTIALS

• Flattish 3Q21 earnings. We believe that 3Q21 earnings could exhibit a flattish to slight qoq and yoy contraction due to the stricter lockdown impacting premium trends. That said, higher investment income on lower bond yields may help to partially mitigate the weaker 3Q21 premium trends due to the stricter lockdown.

• Gradual recovery underway. As the economy reopens in 4Q21, premium growth has started to recover from Oct 21 onwards leading to a gradual improvement in 4Q21 earnings outlook. However, given the uneven economic recovery, we are only expecting a modest 3% and 5% net premium growth for 2021 and 2022 respectively.

• Valuations supressed despite earnings resilience. The stock is still trading at 2SD below its historical 5-year mean PER despite earnings remaining largely intact throughout the pandemic. As such, despite a modest growth outlook, we think that current valuations remain attractive and may not have priced in potential upside surprise in growth in 2022 as economic reopening gathers momentum. Potential growth catalysts could emanate from stronger-than expected mortgage reducing term assurance (MRTA) premium growth riding on the strong mortgage approval growth.

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EARNINGS REVISION/RISK

• Factoring in the one-off impact of the Cukai Makmur and the cessation of tax incentive for Wakalah income for Family Takaful premiums, we cut our 2022 and 2023 earnings by 14% and 5% respectively.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower target price of RM4.80 from RM5.36 post earnings revision. In an attempt to smoothen out the one-off impact of Cukai Makmur to our target price, we peg our valuations to an average of 2022 and 2023 earnings. Our target price is also based on a blended SOP of P/B and PE, and implies a 12.0x 2022/23F EPS which is largely in line with its 10-year historical mean PE. The stock is trading at an undemanding –1.5SD to its historical 10-year mean PE, coupled with expectations of a recovery in its Family Takaful premium trend. More importantly, we note that the share price recent steep decline was largely attributed to non-fundamental factors while longer-term growth prospects remain promising. As such, current PE valuation at -2SD to its historical mean does present an excellent opportunity to accumulate the stock on weakness, on expectations of a recovery.