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Syarikat Takaful Malaysia: Is 7.7% Yield Sustainable?
By: Peter Ng
Articles (81) Profile

Before we dive into the specifics of the company, it is crucial to acquire some background knowledge on what a Takaful operator is and how it works.

What Is A Takaful Operator?

While sharing similar characteristics with conventional insurance, Takaful, which refers to insurance that is compliant to the Shariah laws, is significantly different from conventional insurance.

A Takaful is created with the belief of mutuality, where a participant will make a contribution in the form of donation into a Takaful fund.

Unlike conventional insurance where the underlying risks are transferred to the insurer, in a Takaful, the risk is shared among the participants.

In short, a Takaful operator is unlikely to face a situation like American International Group (AIG), where the excessive amount of claims laid on AIG, one of the largest insurance and financial services companies in the world, left the company in financial distress before it was bailed out by the US Federal Reserve.

The role of a Takaful operator, Wakil, is to collect contributions from participants, invest the contributions into Shariah-compliant funds to generate investment income, and make arrangements to pay out compensation monies from the contribution pool in the event of a claim. As a Takaful policyholder is the owner of the fund, they are entitled to profits made from investments.

A Takaful operator can operate the Takaful fund in two Shariah compliant models, the Mudharabah and Wakalah concepts. The main difference between the two lies with their remuneration. Under the Mudharabah model, a Takaful operator will share a cut from the surplus generated from investments made through the participants’ contributions.

Opposed to Mudharabah, a Takaful operator under the Wakalah or agency concept does not participate in the surplus generated from investment returns, but is entitled to a Wakalah or fixed fee for the services it performs.

Cash Cow Business From Recurring Revenue

As a Takaful operator who operates under the Wakalah concept, Syarikat Takaful Malaysia receives a fixed fee from the management of Takaful funds.

Coupled with the low but growing penetration rate of Takaful in Malaysia which currently stands at 54 percent according to Bank Negara’s estimate as at 2012, creates not only a recurring but also a growing stream of revenue for Takaful operators. The company noted that it holds approximately 40 percent of the market share, making it the largest player in Malaysia.

All of this is reflected in the company’s performance as its revenue registered a compounded annual growth rate (CAGR) of 34.4 percent, matched with a 21.5 percent CAGR on net earnings, on a 10-year period between FY04 and FY13.

Source: FactSet

Due to the nature of its business which involves the leveraging of assets, one of the key metrics in assessing the profitability of financial institutions (which Syarikat Takaful falls under) is return on assets (ROA).

On the same 10-year period, Syarikat Takaful’s ROA has increased consistently after a decline in FY10 and came in at 2.3 percent in FY13. This is more than two times the average ROA of financial institutions in the US (0.95 percent) according to Guru Focus, and not forgetting that the US financial institutions are generally less risk adverse compared to Asia.

Valuations

On a valuation standpoint, Syarikat Takaful’s price-to-book ratio stands at 2.8 times based on the closing price on 12 December.

Considering that the company’s five-year historical price-to-book ratio ranged from 0.56 to 2.9 between FY09 and FY14, at the current price to book ratio of 2.8 times, there is no doubt that valuations are rich. This could largely be expected since the company’s impressive ROA performance should not have gone unnoticed.

For investors seeking for yield, Syarikat Takaful rewards its shareholders with a 7.7 percent dividend yield based on the dividends paid in FY13 and closing price on 12 December.

This compares significantly well compared to the constituents listed on the Kuala Lumpur Stock Exchange which return an average of approximately 3 percent.

Nonetheless, a yield investor should be wary of a company’s ability to sustain its dividend payouts. For a yield investor, free cash flow position should be looked into closely since dividends are ultimately paid out in cash and shortfalls if any, could hint a cut in dividends.

For Syarikat Takaful, two out of five years of its free cash flow position between FY09 and FY13 had been negative (FY09: -RM149.1 million, FY10: -RM33.6 million), suggesting that the company has paid out dividends from other sources other than its earnings. On a brighter note, since FY11 the company’s free cash flow position has shown improvements as they re-emerged and maintained in the positive territory.

Strong Business Model But Dear Valuations

As a Takaful operator and for the services it provides, Syarikat Takaful charges a fixed fee for the provision of its services. More importantly, a Takaful operator does not inherit the underlying risks from a Takaful policy holder. The result for a pure Takaful operator like Syarikat Takaful is a recurring revenue stream backed by a strong business model.

Likewise, paying a fair price for any investments is just as crucial as identifying a great business to invest in. Trading at 2.8 times its book value, this represents the highest valuation based on the last five financial years (FY09 to FY13).

Lastly, a dividend yield of 7.7 percent could seem attractive on hindsight but investors should also pay attention to dividend sustainability.

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

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