Dampened by weak investment income

■ STMK’s 1Q22 net profit was below our expectations (at 19.3% of our full-year
forecast) due to lower-than-expected investment income.
■ We expect STMK’s 2Q22 net profit to increase by around 10% yoy, mainly
supported by strong growth in GEC.
■ Reiterate Add given its attractive valuation (FY23F P/E of only 5.8x) and the
strong growth in GEC.

1Q22 net profit below expectations

Syarikat Takaful Malaysia Keluarga’s (STMK) 1Q22 net profit was below our expectations
as it accounted for 19.3% of our full-year forecast. The variance mainly came from lower-than-expected investment income. STMK’s 1Q22 net profit was in line with the market
expectations at 24.9% of Bloomberg consensus full-year forecast.

Investment income drags net profit

STMK’s net profit fell 14.1% yoy in 1Q22, mainly dragged down by (1) a 23.2% yoy drop
in investment and other income (as bond yields rose anticipation of interest rate hikes), (2)
an increase of 9.2% yoy and 15.3% yoy in management and other expenses respectively,
and (3) a higher tax rate of 28.8% in 1Q22 vs. 11.6% in 1Q21, lifted by additional taxation
from Cukai Makmur. However, the bright spot was the 12.2% yoy growth in 1Q22 gross
earned contribution (GEC; akin to premium for conventional insurers). Its 1Q22 GEC grew
by 10.5% yoy for family takaful and 15.8% yoy for general takaful.

Expect net profit of around RM90m in 2Q22

We expect STMK’s 2Q22 net profit at around RM90m in 2Q22, close to the RM86.8m in
1Q22 as the 2Q22 investment income would remain weak amidst the interest-rate upcycle
and the tax rate would continue to be high (lifted by Cukai Makmur taxation). This would
translate into yoy net profit growth of around 10% in 2Q22, driven by GEC increase.

Lower FY22F EPS forecast

We cut our FY22F investment income estimate by 25.4%, leading to a decline of 17.1% in
our FY22F EPS forecast. However, this has minimal impact on our DDM-based target price
of RM7.00, which is derived from discounting the EPS from multiple years in the future.

Reiterate Add on STMK due to attractive valuation

We retain our Add call on STMK as its FY23F P/E of 5.8x is more than two standard
deviations below the 5-year historical average of 10x. Potential re-rating catalysts include
strong growth in GEC (at 12.2% yoy in 1Q22 and our projected 8.3% in FY22). In addition,
despite the yoy decline, its FY22F ROE of 19.5% is one of the highest in the financial
services sector and we expect the ROE to recover to circa 23% in 2023-24F.