Takaful- the hare awakened from its snooze?

Background

Syarikat Takaful Bhd ('Takaful')'s principal activities consist of managing family and general takaful businesses, whilst the principal activities of the subsidiaries are family and general retakaful business and investment holding. To carry on its insurance business in accordance to the Islamic principles, Takaful has adopted the Wakalah contract as its business model.

The Wakalah Business Model

Briefly, Takaful insurance illustrates the act of a group of people reciprocally guaranteeing each other for mutual financial aids and assistance to the participants, whilst Wakalah is an authorisation contract whereby a person appoints and authorizes someone to execute certain tasks on his or her behalf. The Wakalah model allows Takaful to act as the agent (or Wakil) to manage Takaful funds on the behalf of the participants. For more, go here.

Results Update

For QE30/6/2012, Takaful's net profit dropped by 27% q-o-q but rose 37% y-o-y to RM22.6 million. Its revenue rose by 4% q-o-q or 36% y-o-y to RM446 million. The higher revenue on q-o-q basis was due to higher sales from Family Takaful business. This did not however translate to higher profit due to lower surplus transfer & higher realized gain on disposal of investment in preceding quarter (QE31/3/2012).


Table: Takaful's last 8 quarters' results

The chart below shows clearly the growth potential of Takaful as more Muslims begin to take up insurance products that comply with the Islamic principles.


Chart 1: Takaful's last 25 quarters' results

Valuation

Takaful (closed at RM6.42 last Friday) is now trading at a PE of 11 times (based on the last 4 quarters' EPS of 57.47 sen). At this PE multiple, Takaful is deemed attractive. This is especially so given its high CAGR of at least 20%.

Technical Outlook

Takaful has risen substantially over the past six months.Takaful broke above its long-term downtrend line at RM1.70 in July 2011. After a pullback to the breakout level in October 2011, Takaful rallied in early 2012.


Chart 2: Takaful's monthly chart as at August 10, 2012 (Source: Tradesignum)

After the strong rally of the past 6 months, Takaful could be due for consolidation. It may pull back to its intermediate uptrend line support at RM6.00. If this support can hold, the rally may continue. If the uptrend line is violated, the stock would require a longer consolidation phase.


Chart 3: Takaful's daily chart as at August 10, 2012 (Source: Quickcharts)

Conclusion

Based on the good financial performance, strong growth and farily attractive valuation, Takaful could be a stock for long-term investment. However, it has risen quite substantially over the past 6 months and could be due for consolidation. It would be advisable to wait for the consolidation to buy into this stock.