STMB to gain from strength in Islamic banking

PETALING JAYA: The long-term growth outlook for Syarikat Takaful Malaysia Keluarga Bhd (STMB) looks bright, according to analysts.

Hong Leong Investment Bank Bhd Research (HLIB Research) said most of the insurance provider’s businesses were faring well and fairly insulated from medical-inflation headwinds and price caps.

Despite ongoing trends within the overall insurance industry, STMB was well positioned as its medical segment accounted for just 9% of gross contributions from its family takaful segment or 6% of total gross contributions including the general takaful business.

Additionally, a large portion of its medical business falls under employee benefits where STMB practices strict pricing discipline.

“We understand that STMB does not compete on rates to secure employee-benefits business to avoid taking on unprofitable clients. Thus, medical inflation should not be too much of a concern for the company,” the research house said.

HLIB Research said, meanwhile, STMB’s credit-related segment, which makes up the biggest part of its family takaful business, experienced 17% growth last year.

The growth was mainly driven by bantakaful, which grew 20% year-on-year, riding the strength of Islamic banking.

The research said it expects the trend to persist this year considering the resilient economic conditions.

It also noted that despite STMB’s business with the Public Sector Home Financing Board growing only 2% year-on-year, momentum had been picking up especially in the last two quarters of last year.

The research house said it retained a “buy” call for STMB with a target price of RM4.90 based on 1.88 times price-to-book-ratio for this year with assumptions of 20.1% return on equity, 12.1% cost of equity, and 3% long-term growth.

“In our view, this segment will continue to thrive on the back of its dominant 60% market share and the wage increase for civil servants last December, which could support higher demand for housing-loan financing,” HLIB Research said.

According to the research house, the fire business decreased 15% year-on-year last year as STMB cut back on some commercial customers.

“This is not overly worrying because they have thin margins. That said, we believe the retail franchise would chug along well, in line with the robust sales of its mortgage-related product,” the research house said.

On top of that, HLIB Research said that retakaful rates have remained stable.

“Separately, STMB continues to be tight-lipped on the bancassurance renewal with RHB Bank Bhd this year. We note that it cost STMB a fee of RM151mil in 2020 and RM45mil in 2015. Although this was a steep step up, RHB did achieve the financial milestones set by STMB under their partnership,” it said.

The research house said it retained a “buy” call for STMB with a target price of RM4.90 based on 1.88 times price-to-book-ratio for this year with assumptions of 20.1% return on equity, 12.1% cost of equity, and 3% long-term growth.

The research house said that the STMB’s premium to peers was warranted because STMB is one of the leaders within the Islamic insurance industry and is the only listed purely takaful operator on Bursa Malaysia with a strong returns on equity.

“We find that its risk-reward profile remains skewed to the upside as it is undervalued, trading close to minus 1.5 standard deviation of its price to book ratio.”