Some Muslim customers prefer Syariah compliant products

The government promotes Islamic finance. The growth potential can be inferred from historical growth rate. Allianz quarterly presentations contain general insurance vs general takaful growth data.

@dumbMoney, you're absolutely right. Shareholders have to defend their own interests by voting. Good to hear the case mentioned by Just88. The message should reach out to more of them.

The takaful industry has been growing faster than conventional insurance. I believe takaful players will continue to grow faster in the next few years. Allianz does not have a takaful license.
However Allianz is a good company with growing dividend and valuation not expensive. Being a foreign controlled company also has the advantage that parent in Germany has the same interest as us minorities to repatriate excess cash for better opportunities elsewhere through dividends.

Fund managers who dare to buy into this value trap would have been fired long ago.
The stigma with ICAP means no fund manager will want to the name of ICAP to appear on their stock portfolios, which they must publish to unit holders bi-annually. Why should fund manager take the career risk?
Short of COL mustering enough votes to kick out the board, buyers of ICAP can only hope for other unsuspecting retail investors to buy their tickets!

I'm not sure about other takaful players. But the 40% PNB owned GLC Maybank is the largest player, and is certainly competitive and nowhere near bankrupt.

Our of its 9 billion takaful & insurance revenue in 2022, takaful contributed 40% and conventional another 60%. If takaful player like Maybank is uncompetitive and only depends on government's handout, how could it grab its 60% conventional insurance business?

As for efficiency, which metric do you look at? One of the most important metric should be capital return efficiency. Based on latest quarter, Syarikat Takaful annualized ROE is 25.6%, beating every other insurance companies that I track.

I don't disagree that the takaful industry get a lift due to government's promotion of Islamic finance, and that Syarikat Takaful share price performance is miserable. But claiming that they cannot survive without government aid should be at least backed up by some data.

STMKB may wish to become a monopoly. Except that it only has just over 20% market shares in both Family and General Takaful!
Maybank Etiqa is probably bigger.
Your dissatisfaction is probably to do with promotion of takaful industry at the expense conventional insurance? STMKB is just one of the many players in the Takaful space.

Refer Takaful QR.
Shareholders' equity as of 2022 was RM1,986m under MFRS4, restated to RM1,347m under MRFS 17, i.e. 32% decline.
However, by 31 Mar 2023, shareholders' equity has increased to RM1,469m. A 9% increase in one quarter! The growth is impressive.

A large order at market closing bought up to 3.38. Will be interesting to see how the QR is like.

Share price continued to inch up today. All analyst reports are positive. My guess is the dividend in Q1 has contributed to buying interest. It would be interesting to see if EPF will buy again.

I do not have a view on this stock. However, investors beware that people making bullish or bearish comments could be either affected by their own bias, or worse, have a financial self-interest in their hope to influence other unsuspecting forumers.

Comments usually appear in abundance when stock price is tanking or shooting over the roof. At other time it’s very quiet.

But making a price prediction without backing up with data or fact is practically useless

Also take note FPI is one of the Bursa approved stocks for short selling.
https://www.bursamalaysia.com/trade/trading_resources/equities/regulated_short_selling

I agree changes in EV will not be a share price driver. GE is also priced below EV.
From the past experience of AIA, NBV growth is. I hope it can regain NBV growth.

I'm not sure how much Takaful's profit decline under IFRS17 has been priced in given the share price has almost halved from 2019 peak.
Besides, Takaful revenue growth has been impressive, including its general takaful. Allianz presentaiton shows that while in 3M23 AGIC GWP grew at 4.5%, the Takaful industry grew at 19.9%. While life insurance may be safe from takaful, I wonder whether it has become a trend in GI where Muslim clients switching to takaful.
The profile of Takaful retail shareholders could also be different from Allianz. But EPF is important shareholders in both. I'm puzzled why PEF started to dispose Allianz as recently as last week.

In my view, increased dividend is certainly an attraction for Allianz, and it has been flagged so in the annual report. It provides greater certainly to investors who value stable income over capital appreciation.

In the latest report, RHB put the valuation at 0.9X P/B for general insurance + 0.9X EV for life.
RHB quoted RM3.6b for EV based on management guidance, and put the GI equity value at RM2,405m.
Divided by 346mil shares on fully diluted basis.

Kenanga values it at 0.7X P/B for GI + 0.8X for EV.
Kenanga assigns RM3,516.2m to EV (not sure how it could be so precise), and GI book value is RM3404.9m (which is very different from RHB)

Profit will certainly decline, and by a large margin. The management has provided guidance last year. Whether share price is up or down depends on whether the coming "bad result" is better or worse than expected.

Why are there no more core profits under IFRS17? Are all fair value gains/ losses reported under OCI now?

OK, slide 29 shows that for life, CSM release is RM95m. So CSM release is purely for life?

For 3M23, Group PBT is RM232.3m, where GI contributes RM139.8m, and life contributes RM96.5m (slide #9).
CSM release for 3M23 is RM95m (slide 13)
Given that CSM is pre-tax, it should be compared against (IFRS17) PBT right?

Of the RM95m CSM release, any idea how much is from life, and how much is from GI?
What are the other sources of PBT? Investment return?

But one bright spot is they annouce DPS of 31.5sen (37.8 sen for ICPS). Didn't expect that in first quarter.
Earlier management mentions positive dividend trajectory in the annual report.
While it takes time to learn all these new concepts, one thing very simple and real is dividend.
I just hope that higher dividend does not mean NBV stops growing.

Just to be clear, you mean the NBV presented now is CSM, which is gross tax?

And to get the old NBV definition, we have to sum up New Business CSM + New Business RA, and deduct the tax?

Where can we get the NB CSM and RA info?

Slide #9 shows, based on MRFS17, NBV declined YoY from RM77.6m (3M22) to RM70.1m (3M23)
However, slide #26 shows that ANP increased YoY from RM147.1m (3M22) to RM163.4m (3M23)
NBV margin has declined. Slide #24 explains it's "due mainly to increase in acquisition expenses."

However, slide #27 shows that ILP has grown by 18.5%, whereas traditional products contracted at -23.5%.
Given ILP is said to have higher margin, rightfully margin should have expanded isn't it? The acquistion expenses must have increased quite substantially?

Before the result, I was expecting an increase in NBV since GE Malaysia and AIA Malaysia both registered NBV growth in 1Q23.

The new standard is quite a steep learning curve for me. Not just new concepts, but also have to learn how to compare against past standard!

Refer analyst presentation slide #7. Value of New Business (NBV) under MRFS4 is RM275m. Under MRFS 9/17 is RM300m.
I'm confused by the explanation "MFRS 9/17 view is before tax". So is the NBV of RM300m before or after tax?

@dragon328, good explanation! Thanks!

I agree that P/B approach is not satisfactory due to the arbitrary nature of book value. But valuation based on multiple allow easy comparison with the past. The other multiple appoaches like P/E, P/S, P/CF are equally challenging due to business volatility as discussed earlier.

You have a good point on current low utilization. Yes, valuation cannot reach replacement cost if the industry is still awash with idle capacity in the forseeable future. Replacement cost, at best, represents the ceiling of valuation at this moment.

Yeah, the ICPS is entitled for dividend, at 1:1 to each ordinary share.

HLIB's TP is RM2.78 based on 0.87x P/B multiple.
Working backward, the book value per share = RM3.2, which is slightly lower than my calculated BVPS at RM3.3
10 year average PB should therefore = 2 * 0.87 = 1.74x.
P/B multiple should correlate with ROE. The highest ROE achieved was about 11% in 2012-13.

However I notice the share price peaked in 2013 to 15, close to RM10 per share, even though profits were less impressive.
I suspect the share price then was driven by speculative fever as it was the period where the Najib's government tied to push multiple mega projects like LRT3, MRT3, HSR, ECRL ...

Yes, HLIB's position of 50% discount to 10-year PB average is arbitrary. However, they have a point that future infra spending is unlikely to match Najib's time, which sent Lafarge Malaysia share price to almost RM10 on future expectation that never came true. Hence a lower valuation now as compared to the past standard.

Their second justification on "heavy carbon emitting business" probably refers to fund managers today shunning perceived polluting companies. Either these managers' mandate prohibit them from investing, or they're concerned about how to exit in the future if many other fund managers are prohibited from investing. Such reduced interest from money managers due to ESG factor is a recent development. So it could also drive valuation lower as compared to the past.

A really dumb question. Do EV (as we discussed in Allianz context) and EV Equity (as disclosed by AIA) mean the same thing?
(disregard the fact that they use different EV approaches)

Refer my EV calculation example above. Can I take the following short cut on EV estimate?
1) Assume unwind impact = opening EV * discount rate (i.e. risk free rate)
2) Assume profit released = PBT (i.e. IFRS4 profit as you said) * (1 - tax rate)

If not, short of depending on Allianz's disclosure, is there any shortcut to estimate closing EV based on P&L data?

However, the signs are different.
"Expected return on EV" increases AIA EV Equity. But "profit released" reduces Allianz EV.

Meanwhile, AIA presents its EV Equity calculation in the following way (refer page 18 of its 2022 annual results presentation):

(1)
Opening EV Equity + EV Operating Profit = EV Equity before non-operating variance
where EV Operating Profit = Expected Return on EV + VONB + Operating Variances + Finance Costs
(2)
EV Equity before non-operating variance + Investment Return Variances + Economic Assumption Changes + Exchange Rate and Other Items = EV Equity before Return to Shareholder
(3)
EV Equity before Return to Shareholder - Dividend Paid - Share Buy-Back = Closing EV Equity

Based on its past results, I notice the component "Expected Return on EV" is a large number, about 6% to 7% of opening EV Equity. This expected return is off set by investment return variances, which is a volatile number.

The other major component is the return to shareholder, i.e. dividend paid + share buy-back.

I wonder, conceptually, how can the AIA equation be mapped to equation we use for Allianz (Closing EV = Opening EV + NBV - profit released + unwind impact).

Instead of deducting profit released, AIA equation only deducts dividend paid and share buy-back.

AIA adds "expected return on EV" + "investment return variances" to its EV equity. But Allianz equation does not include such return.

Where are the links?

Based on your input, can I estimate the 2022 closing EV in this way?

Unwind impact (discounting) = opening EV * discount rate = RM3,500m * 4.5% (assume a long term risk free rate of 4.5% is used, like AIA) = RM158m

After separately account for the unwind impact, can I use PBT (which as you said is based on IFRS4) to estimate the profit released, which is 287.2m * 0.76 = RM218m?

And therefore, Closing EV
= Opening EV + NBV - profit released + unwind impact (discounting)
= 3,500m + 275m - 218m + 158m
= RM3,715m

Allianz Malaysia does not disclose its latest EV in the 2022 annual report. I wonder whether it can be estimated.

As disclosed last year, EV for ALIM as of 31 Dec 2021 was about RM3.5b.
NBV for 2022 was RM275m
PBT for life insurance for 2022 was RM287.2m.
Assume a standard tax rate of 24%, net profit released from life in 2022 = 287.2m * 0.76 = RM218m
(The effective tax rate in 2022 was actually 32.8% due to prosperity tax. However I believe the EV has not expected this one off prosperity tax. Therefore I used 24%).
2022 closing EV = 2022 opening EV + NBV - profit released = 3,500m + 275m - 218m = RM3,557m

In other word, 2022 year end EV is more or less unchanged from a year ago. Is this the right way to go about it?

Thanks for the clarification. OK, I didn't know that risk free rate is also used as assumed earning rate. It's reassuring to know that the MCEV does not result in an inflated EV!

I wonder why risk free rate is used in MECV. I asked Chat GPT and this was the response.

"Market Consistent Embedded Value (MCEV) does not necessarily use the risk-free rate as both the discount rate and earning rate. In MCEV calculations, different discount rates and earning rates are often employed to reflect the specific characteristics and risks associated with different cash flow components. However, the use of a risk-free rate as a component of the discount rate in MCEV calculations is not uncommon, and there are several reasons for its inclusion:
1. Risk-Neutral Valuation: The risk-free rate is often used in MCEV calculations as part of the risk-neutral valuation approach. By employing a risk-free rate, MCEV aims to remove the effect of market risk from the valuation and focus on the time value of money alone. This helps in isolating the intrinsic value of the insurance contracts and facilitates comparison across different types of liabilities.
2. Consistency with Market Pricing: The risk-free rate represents the return available from investments considered to have no credit or default risk. By utilizing the risk-free rate, MCEV aligns the valuation of insurance contracts with the pricing of financial instruments in the market. This promotes consistency and comparability between the market value of liabilities and the value attributed to them in MCEV.
3. Long-Term Horizon: Insurance liabilities often have long-term durations, and the risk-free rate is commonly used to discount future cash flows over extended time periods. The risk-free rate reflects the time value of money and is considered a reasonable approximation for long-term risk-free investment returns.
4. Policyholder Security: The use of a risk-free rate as part of the discount rate in MCEV calculations helps ensure that policyholder obligations are appropriately valued and provides a conservative approach to safeguard policyholders' interests. By employing a risk-free rate, MCEV captures the minimum level of return that should be earned on the invested assets to meet future policyholder obligations."

Although I don't fully understand, it seems that comparability is an important objective, and using the same risk free rate makes comparison easier.

@dragon328, can you explain how did Wessex Water make a loss due to "interest accruals on index-link bonds, a non-cash impact of RM75 million"?

How does it work? Is the loss due to "interest accurals" also get compensated in the form of higher tariff in future regulatory period?

Extracted from HLIB's latest report:

"We believe attaching a 50% discount to 10 year P/B mean is justified considering: (i) structurally
lower infra spending (vs the past) and (ii) heavy carbon emitting business"

"Our TP is derived based on fully diluted target P/B multiple of 0.87x based on c.50% discount to 10 year P/B average (implies -1SD to 10 year mean)"

@dragon328, thanks for sharing your calculation.

I refer to quarterly report Note B13 (i) and (ii), wt. avg number of ordinary shares is 1,310m. ICPS 467m. The fully diluted share base = 1,310m + 467m = 1,777m.

Yes, it's difficult to project future revenue and profit for such cyclical industry with highly variable cost, volume and ASP.

One simple approach I used is to assume that, in the long run, the business will at least earns its cost of capital, and shareholders earn their cost of equity. Price to book should be at least 1 time.
The latest equity attraibutable to owner is RM5,870m. Divided by 1,777m (assumed all ICPS converted), net asset per share = RM3.30. So I assume RM3.3 is a conservative estimate for the long term share price.

However, when acquiring from Lafarge, and again when injecting assets into Malaycan Cement, YTL valued it at RM3.75 per share. Maybe they're confident to generate synergy and to create more values from the enlarged business.

Another approach is to use asset replacement cost. I once read in a HLIB report that replacement cost is USD100 per metric ton of capacity. I failed to find other sources that confirm their assumption. Let's assume they're right.
HLIB put the current capacity at 23.84m Ton.
Therefore the enterprise value = 23.84m * USD100 * 4.6 (exchange rate) = RM10,966m
Fair market cap = EV (10,966m) - non controlling interest (4m) - debt (3,519m) + cash (474m) = RM7,921m
Dividend by 1,777m shares, value per share = RM4.46

Based on above methods, the long run value I got is between RM3.3 to RM4.5 (but your value is lower at RM3.13 if divided by 1,777m shares)

About EV, as mentioned in Allianz Malaysia 2022 Annual Report,
"ALIM computes the Embedded Value using market consistent embedded value approach whereby the Embedded Value is the present value of future shareholders distributable profits after tax discounted at the risk free yield curve with volatility adjustment plus the Net Assets Value."

I don't understand what it mean by "risk free yield curve with volatility adjustment plus the Net Assets Value". But if future profits are discounted based on risk free rate at about 4%, by similar arguement, the resulting EV will be too large (from a shareholder's valuation point of view).

In this case, is ALIM actually worth less than the RM3.5b (which is the EV as of 31 Dec 2021)? Of course, for simplicity we ignore the extra value associated with NBV growth.

As comparison, I believe AIA uses Traditional EV approach.
As explained in AIA Annual Report, "AIA Group Limited, together with its subsidiaries use a traditional deterministic discounted cash flow methodology for determining its EV and value of new business (VONB) for all entities other than Tata AIA Life Insurance"
AIA's 2022 annual result presentation mentions it uses a risk discount rate of 8.92% for Malaysia business (4.5% of long term 10year government bond + 4.42% risk premium).
AIA Malaysia EV as of 31 Dec 2021 is USD3,274m.
Given that AIA uses a higher discount rate, can I say that the EV presented by AIA is more "prudent" or "conservative" than Allianz Malaysia?

You mentioned "IFRS17 must use market consistent (i.e. risk free rates) for all cashflows projection".

I'm not sure if my interpretation is correct.
From a shareholder's stand point, usually future earnings are discounted based on the cost of equity, which is higher than the risk free rate (10Y MGS yield is ~4%).
If the unearned profits as estimated from CSM + RA are discounted based on risk free rate, the value will be too large (to be used as a proxy of a life insurer's valuation)
Maybe it's still useful as a valuation proxy of general insurers. The discounting effect is smaller for general insurer since their insurance policy tenures are within a year.
Is this a fair comment?

You mentioned that CSM + RA = future unearned profit, before tax (241m + 232m = 473m)
Next, by applying a standard tax rate of 24%, you worked out the sum of future net profits (473m * 0.76 = 360m).

My next question is, will this after-tax unearned profit (i.e. CSM + RA, after tax) be roughly similar to Embedded Value (EV)?
After all, EV is the PV of future profits, after accounting for tax effects.
I wonder whether it is possible to (roughly) cross check the EV based on published CSM and RA figures.

Thanks for the explanation. It’s very useful!

How much leeway do insurance companies have in calculating CSM for old block of business? Are we talking about an under estimation by 10% - 20%, or could be a lot more?

I've done a simple exercise on Manulife valuation.

The asset management services generated annual PBT of RM18m in both 2021 and 2022 (refer page 177 of 2022 Annual Report). Assume after tax profit of RM14m, and assume 7 times PE, the asset management business is worth about RM100m.

After deducting this RM100m from Manulife market cap of RM420m, the life insurance business is value at about RM320m.

This is more than its CSM of RM241m. RM320m is equal to 100% of CSM (at RM241m) + 34% of RA (=0.34 * RM232m = RM79m).

Is this the way to look at the valuation?

I have a question on "intentionally" setting a low CSM.

Based on what I read, for group of profitable contracts,
PV of cash inflows = CSM + RA (risk adjustment) + PV of cash outflows.

Therefore if Manulife, being conservative, sets a low CSM, it will have a correspondingly higher RA to reflect the greater risk perceived.

However, if the risk does not "materialise", the RA will still be "released" along with CSM at the end of period.

Refer Manulife Note A13, the insurance revenue is made up of RM11m of "CSM recognised for service provided", as well as RM8.7m of "Change in risk adjustment for non-financial risk expired"

What I tried to say is, if we suspect Manulife is being "too conservative", can we treat its true CSM as not only the reported CSM of RM241m, but also to include part of its RA of RM232m?

@dragon328, thanks for the sharing.

With increased pace in property construction, and assuming more infrastructure projects are rolled out in 1-2 year time, what is your estimate of a sustainable revenue level, margin and valuation of MCement?

Looking back at Lafarge Malaysia history, annual revenue reached ~RM2.8 billion during the boom time of 2012-14. PBT margin was as high as 18% (in 2013).

After acquiring YTL Cement assets, capacity should have been expanded further. Rawang plant has been closed for upgrade. Once completed, it should become a more efficient plant.

On the valuation side, we have to account for the 467m ICPS issued when acquiring YTL Cement assets.

I'm trying to get an idea of what a full valuation will look like. Any idea?

Manulife just annouced its results. Note 2b shows effects of MFRS9 and 17 adoption, where total shareholders’ equity increased from RM955m to RM1,186m

Note B3 mentions
"Life insurance business – Operating revenue of life insurance business increased by RM13.0 million or 11.6% mainly due to higher contractual service margin (“CSM”) amortisation and risk adjustment release as a result of higher inforced business."

Manulife revenue and profit have been rather stagnant over the years. It seems the company is not doing too well. Any idea why?

Maybank published its results today. Not sure if I've missed something. The effects of MFRS17 adoption have been rather muted.

Group insurance & Takaful contributed RM238m to Maybank's total operating profit of RM2,979m (Note A30). The effects of MFRS17 adoption was to increase operating profit by a mere RM2.8m i.e. 1% only (Note A40 i)

Maybank has a balanced insurance portfolio. Based on total operating income, life/ family takaful/ general takaful/ general & others are RM350m/ RM171m/ RM93m/ RM57m respectively (Note 38a)

Does Maybank's experience with MFRS17 has any bearing on other insurers?

@dragon329, thanks for the heads-up.
Hope the government knows where it's heading by replacing SWN with DWN. Five years have passed since first PH government engaging telco players on 5G.

@dragon328, good inputs on electricity tariff.
On 5G, it's unclear how DNB could become financially viable if government does not force major telcos to subscribe its wholesale service (and thereby spread the fixed cost).
Although details are still lacking, if CelcomDigi and Maxis are given the leeway to set up their second network, and they are allowed to only roll out 5G to profitable urban areas (instead of the entire county as demanded on DNB), these incumbents can enjoy lower 5G infrastructure cost by not shouldering the national duty to bring 5G to rural areas. Maybe their 5G cost will be even lower if Huawei offers them a sweet deal in order get into the Malaysian 5G market.
If DNB fails due to blunder by the government action, I'm afraid YES could be hurt as it's not only a customer but also a 20% equity owner of DNB.

On the other hand, it's not very clear how the flipflop in commitment towards SWN may affect YES

The lifting of RE export ban is the right move.
The earlier ban by the previous government in order to induce foreign investment is short-sighted. If Mayalsia with its abundance of cheap land does not want to sell solar powered energy to Singapore, it will only benefit Indonesia.
Of course, the greater availability of RE in Singapore means more green energy powered data centers can be built on Singapore soil. But I don't believe the tactic of grabbing business from Singapore by starving them of RE could work (Singapore can still buy RE from Batam).
Part of the profit from the RE export can be used to cross subsidize the domestic power sector. It also goes someway towards "compensating" the 3 sen per 1,000 gallon water deal, which in the past has been a sore point in bilateral relations. Malaysia through its hinterland can and should continue to supply water and electricity to the city state in a mutually beneficial way.

Great Eastern's NBEV in Malaysian market grew at 3%. Meanwhile AIA reported double-digit VONB increase in Malaysia.
Given the Malaysian market has recovered, let's see if Allianz can finally deliver some growths after four quarters of decline.

CPO prices depend on many other factors besides palm oil production output. If other edible oils remain weak, CPO price cannot go much higher.
https://www.theedgemarkets.com/node/664033

Since the excessive rainfall affects other companies, the shortfall in 1Q output has been compensated by higher prices.
“This has resulted in a sudden spot month shortage of CPO contributing to a significant inverse market with spot prices reaching above RM4000/MT. This temporary market shortage due to the sudden lower production is expected to reverse from May onwards as production is expected to increase again. “

However, when output recovers in 2Q, spot price may come under pressure.