TAKAFUL: Takaful Provider Faces Headwinds, Earnings Outlook Trimmed

A recent research report by RHB highlights that a prominent takaful provider is navigating a period of “looming headwinds” that are expected to constrain its earnings growth for 2025 and 2026. RHB has maintained a “Neutral” rating for the company, adjusting its target price downwards to MYR3.20 from MYR3.40. This new target price indicates a modest 5% upside potential with an estimated 5% FY25F yield. Despite a year-to-date share price decline of approximately 22%, the stock continues to trade at a premium valuation compared to its industry peers, a position RHB deems justified.

Performance and Market Standing

As of June 2025, the takaful provider reinforced its market leadership, holding a substantial 27.8% share as the largest family takaful operator in Malaysia. The first half of 2025 saw the company report a robust 19% year-on-year growth in gross direct contributions (GDC) for its family takaful segment. This performance significantly outpaced the industry’s overall 2% growth in family takaful, which experienced a slowdown in agency-related activities. In the general takaful sector, the company maintained its second-place position with a 22.8% market share, achieving 5% YoY GDC growth compared to the industry’s 10%. This segment’s growth was primarily driven by motor takaful sales, an area the company is managing cautiously.

Challenges and Future Outlook

The primary challenges identified by RHB for the takaful provider include elevated tax rates, the introduction of maiden finance costs, and the implementation of Sales & Service Tax (SST). These factors are projected to curb earnings growth over the next two fiscal years. Consequently, RHB has revised down its FY26F and FY27F earnings forecasts by approximately 3%. This adjustment mainly accounts for the finance costs associated with the recently launched MYR1 billion Tier 2 sukuk wakalah programme. The company intends to issue MYR500 million from this programme, allocating funds towards working capital, digital initiatives, and IT infrastructure. This strategic move is expected to introduce an indicative finance cost of around MYR20 million per annum.

Strategic Focus and Capital

The takaful provider’s strategic focus remains firmly on its bread-and-butter family takaful products, such as mortgage and personal financing protection, which currently constitute about 90% of the group’s contractual service margin (CSM) balance. Concurrently, the company is actively pursuing expansion in the non-credit retail takaful segment, which includes offerings for solar panels and home assets, noted for being CSM-accretive. A new bancatakaful agreement with RHB Islamic Bank is anticipated to further enhance distribution channels, providing access to RHB’s wealth clients. The group’s capital adequacy ratio remains above the regulatory floor of 130% following the bancatakaful access fee payment, underscoring its solid capital foundation.

Valuation Rationale

RHB has transitioned its valuation methodology for the takaful provider to a price-to-comprehensive equity (P/CE) approach, assigning a 0.75x P/CE multiple. This valuation premium, compared to domestic peers’ 0.4-0.6x range, is justified by several factors: the company’s dominant market position in the domestic takaful industry, its limited exposure to medical takaful, and its consistently stronger Return on Equity (ROE) generation, which is notably higher than that of its competitors.