Syarikat Takaful Malaysia Berhad Family Takaful leader

21 November 2013 Initiating Coverage Syarikat Takaful Malaysia Berhad Family Takaful leader BUY Target Price (TP): RM10.90 INVESTMENT HIGHLIGHTS Leader in the group Family Takaful business, with a 40% market share. Family Takaful 2-year CAGR of 31.8% for the last 2 years. Dividend payout ratio of 40.2% in FY12. Initiate coverage with a BUY and a TP of RM10.90. Founded three decades ago. Syarikat Takaful Malaysia Berhad (Takaful Malaysia) commenced its operation on 22 July 1985. It was officially launched on 2 August 1985 based on the principle of al- Mudharabah with the objective of giving its participants the opportunity to save, invest and earn profits based on this principle. Takaful Malaysia became a public limited company on 30 July 1996 following the listing of its shares on the Main Board of Bursa Malaysia Securities Berhad. Market leader. Takaful Malaysia is a leading player in the Takaful industry in the country. As at 3Q12, it had managed to capture a leading market share of 40% in the group family Takaful business, while holding a 21% market share of the combined Family and General Takaful businesses. Shariah based business model. Takaful Malaysia s business model was founded on the requirements and practices of Shariah. It upholds the virtues of cooperation, mutuality, and solidarity as embodied in the concept of Takaful, and the profit sharing principle of Mudharabah. Currently, it has adopted the Wakalah contract as its business model. Attractive dividends. For FY11 and FY12, the Group has been paying out 36.0% and 40.2% of its net earnings as dividends, translating into effective dividend yields of 1.7% and 2.7% respectively based on the current price of the stock. We expect the Group to maintain their dividend payout ratio at around 40% in the upcoming years. Growing industry. The industry growth in this region has been very impressive, registering double-digit growth in 2012 albeit at a slower rate than in the previous years. As for Malaysia, the industry growth rate exceeded 20% in 2012. Overall, Indonesia, Brunei and Malaysia accounted for USD2b in gross takaful contributions last year. Initiate coverage with a BUY recommendation. We initiate our coverage on Takaful Malaysia with a BUY recommendation and a target price (TP) of RM10.90. Our TP is derived from a price-to-earnings (PE) multiple of 13.9 times of its FY14F EPS, which is based on the weighted PE ratio of its industry peers. Based on its latest price, we believe the stock offers a substantial upside potential over the next twelve months. RETURN STATS Price (20 Nov 2013) Target Price Expected Share Price Return RM9.23 RM10.90 18.1% Expected Dividend Yield 3.4% Expected Total Return 21.5% STOCK INFO KLCI 1,798.69 Bursa / Bloomberg Board / Sector Syariah Compliant 6139 / STMB MK Main/ Finance Yes Issued shares (mil) 162.8 Par Value (RM) 1.00 Market cap. (RM m) 1,497.9 Price over NA 2.6x 52-wk price Range RM5.20 RM9.89 Beta (against KLCI) 0.93 3-mth Avg Daily Vol 0.13m 3-mth Avg Daily Value Major Shareholders RM1.19m BIMB Holdings 60.50% EPF 8.38% KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

2 INVESTMENT STATISTICS FYE Dec FY11 FY12 FY13E FY14F Gross Contributions (RM'm) 1,140.8 1,374.0 1,515.3 1,671.6 Operating Revenue (RM'm) 1,345.5 1,607.5 1,763.1 1,934.4 Profit before taxation and zakat (RM'm) 101.4 125.5 149.9 154.8 Profit for the year (RM'm) 76.4 100.1 114.6 125.7 Net profit (sen) 76.8 101.2 121.7 127.7 EPS (sen) 47.16 62.18 74.72 78.41 EPS growth (%) 36.3 31.9 20.2 4.9 PER(x) 19.6 14.8 12.4 11.8 Net Dividend (sen) 15.75 25.00 30.00 31.50 Net Dividend Yield (%) 1.7 2.7 3.2 3.4 Source: Company, Forecasts by MIDFR COMPANY BACKGROUND Three decades of history. Syarikat Takaful Malaysia Berhad (Takaful Malaysia) was incorporated on 29 November 1984 and commencing its operation on 22 July 1985. It was officially launched on 2 August 1985. Its incorporation was based on the recommendation of the Task Force on the Study for the Establishment of an Islamic Insurance Company in Malaysia set up by the Government of Malaysia in 1981. The Task Force in its report concluded that that a takaful company based on the principle of al-mudharabah would be a viable venture in view that its participants would have the opportunity to save, invest and earn profits based on this principle. On 30 July 1996, Takaful Malaysia became a public limited company following the listing of its shares on the Main Board of Bursa Malaysia Securities Berhad. Subsidiary of BIMB Holdings. BIMB Holdings Berhad is the major shareholder of Takaful Malaysia with a 60.50% stake. BIMB Holdings Berhad, in turn, is a 51.17%-owned subsidiary of Lembaga Tabung Haji, the pilgrim fund. This makes Takaful Malaysia as an indirect subsidiary of Lembaga Tabung Haji. BUSINESS OPERATION Shariah based business model. Takaful Malaysia s business model was founded on the requirements and practices of Shariah. It upholds the virtues of cooperation, mutuality, and solidarity as embodied in the concept of Takaful, and the profit sharing principle of Mudharabah. Currently, it has adopted the Wakalah contract as its business model. In brief, Takaful illustrates the act of a group of people reciprocally guaranteeing each other for mutual financial aids and assistance to the participants, while Wakalah is an authorization contract whereby a person appoints and authorizes someone to execute certain tasks on his or her behalf. The Wakalah model allows Takaful Malaysia to act as the agent to manage Takaful funds on the behalf of the participants. In return, the company is entitled to a Wakalah Fee for managing the Takaful funds and investing the Contribution of the participants. Agency system allows effective distribution. This business model allows Takaful Malaysia to employ the agency system effectively in distributing its Takaful products, and provides sufficient remuneration that commensurate with the services provided. The agents play a big role in the community, as they spread knowledge on the key benefits of being insured and convince people to enjoy these benefits. Under this model, Takaful Malaysia also provides a unique concept of surplus distribution to participants. By contributing Tabarru (donation) into the common Takaful fund, the participant is entitled to the share of fund surplus.

3 STRENGTHS Market leader in Family Takaful. Takaful Malaysia has established itself as one of the leading players in the Takaful industry in the country. As at 3Q12, it had managed to capture a leading market share of 40% in the group family Takaful business, while holding a 21% market share of the combined Family and General Takaful business. Strong branding. Takaful Malaysia has been aggressively carrying up branding and marketing campaigns in order to build its brand. For instance, in 2Q12, it launched the second wave of its highly successful We Should Talk campaign, leveraging on its 15% No Claim Rebate offered on all its general products. This offer provides refunds on contributions paid if no claims were incurred during the coverage period. Uniquely, Takaful Malaysia is the only operator to offer such a benefit. This campaign has been really successful, as it has conveyed the message that Takaful or Islamic insurance in general is suitable for all, Muslims and non-muslims alike, and should be viewed as a first or primary choice for protection, nor just as an alternative to conventional insurance. Growing industry. The takaful industry continues to grow leaps and bounds. Specifically, the industry growth in this region has been very impressive. According to the Ernst & Young World Takaful Report 2012, the industry continued to register double-digit growth in 2012 although at a slower rate than in the previous years. As for Malaysia, the industry growth rate was exceptional, exceeding 20% in 2012. Overall, Indonesia, Brunei and Malaysia accounted for USD2b in gross takaful contributions last year. OUTLOOK AND PROSPECT Industry set for further growth. The country s insurance and takaful penetration rate stood at 54% at end 2012, against the 75% target set under the Government s Economic Transformation Program. This low penetration rate, coupled with a growing population and rising disposable incomes, offers the industry a huge potential for further growth. We expect the industry to sustain its double digit annual growth for the foreseeable future. We anticipate the acceptance towards the concept and products to gain further traction among consumers, due to the combined promotion efforts of the public and private sectors complemented by the strengthening of the regulatory framework. RISK AND CONCERNS Competition set to heat up. As the industry offers a significant growth potential, the competition to gain a larger market share among the industry players is only going to intensify. Takaful Malaysia faces the risk of losing out to other takaful providers if it loses its focus and doesn t continuously improve its products and services. Low liquidity of trading volume. With the parent company BIMB Holdings owning more than 60% of its outstanding shares, the trading volume of the shares has been relatively low due to the low liquidity of the shares in the market. With the reserves amount currently standing at 2.5 times of its paid-up capital, we think it might be a good move for the Group to issue bonus shares to its shareholders which we believe will add the trading liquidity of the stock and lead to higher pricing in the long run. FINANCIALS Strong growth. Takaful Malaysia has been registering an impressive rate of growth for the past few years, with the 2- year and 4-year compounded annual growth rates (CAGRs) of its Family Takaful gross contributions recorded at 31.8% and 10.4% respectively. For its General Takaful business, the gross contributions 4-year CAGR stands at 10.5%. The Group s outstanding performance has been attributed to increased underwriting and investment activity, growing acceptance of the Takaful Malaysia brand, better market accessibility via enhanced distribution capabilities, and the development of strategic partnerships with Islamic banks. On top of that, new initiatives such as its investor relations program, the takaful awareness campaign, and enhanced portals for the agency, corporate agents and bancatakaful have complemented the initial efforts by the Group to strive for greater success.

4 Attractive dividend policy. For FY11 and FY12, the Group has been paying out 36.0% and 40.2% of its net earnings as dividends. This translates into effective dividend yields of 1.7% and 2.7% respectively based on the current price of the stock. We expect the Group to maintain their dividend payout ratio at around 40% in the upcoming years, as we believe this is a sustainable rate that will allow the company to build up on their cash position and at the same time reward the shareholders and investors. VALUATION AND RECOMMENDATION Initiate coverage with a BUY recommendation. We initiate our coverage on Takaful Malaysia with a BUY recommendation and a target price (TP) of RM10.90. Our TP is derived from a price-to-earnings (PE) multiple of 13.9 times of its FY14F EPS, which is based on the weighted PE ratio of its industry peers. Based on its latest price, we believe the stock offers a substantial upside potential over the next twelve months, thus we recommend investors with medium term investment horizon to accumulate the stock. Peers comparison Company Market capitalization (RM m) Market capitalization weightage P/E ratio Weighted P/E ratio Allianz Malaysia 1,597.6 0.20 7.4 1.5 MNRB Holdings 739.4 0.09 7.3 0.7 LPI Capital 3,612.4 0.45 18.4 8.2 Manulife Holdings 692.1 0.09 17.0 1.5 Tune Ins Holdings 1,450.9 0.18 11.8 2.1 Total 8,092.4 1.00-13.9 Source: Bloomberg Gross Takaful Contributions by Segment Source: Company, Forecasts by MIDFR

5 FYE Dec (RM m) INCOME STATEMENT 2011 2012 2013E 2014F FYE Dec (RM m) BALANCE SHEET 2011 2012 2013E 2014F Op. revenue 1,345.5 1,607.5 1,763.1 1,934.4 Fixed asset 237.7 241.1 233.7 226.7 PBT 101.4 125.5 149.9 154.8 Cash 386.5 452.3 493.7 541.6 PAT 76.4 100.1 114.6 125.7 Total Assets 5,846.0 6,371.6 7,052.6 7,737.7 Net profit 76.8 101.2 121.7 127.7 EPS (sen) 47.16 62.18 74.72 78.41 Share Capital 162.8 162.8 162.8 162.8 Net DPS (sen) 15.75 25.00 30.00 31.50 Total Equity 478.0 525.4 578.3 634.5 Takaful contract liabilities 5,067.6 5,463.1 6,065.2 6,654.4 Growth (%) Total liabilities 5,367.9 5,846.3 6,474.3 7,103.2 Op. revenue -22.2 19.5 9.7 9.7 PBT 3.6 23.7 19.5 3.3 PAT 32.3 31.1 14.4 9.7 Net profit 36.3 31.9 20.2 4.9 EPS (sen) 36.3 31.9 20.2 4.9 Net DPS (sen) 36.3 58.7 19.6 4.9 Source: Company, Forecasts by MIDFR Total Equity & Liabilities 5,846.0 6,371.6 7,052.6 7,737.7 DAILY PRICE CHART Zulkifli Hamzah Azman Hussin azman@midf.com.my 03-2772 1663

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 6