Stable operating environment foreseen for LPI next year

TheEdge Wed, Jul 11, 2018 11:12am - 5 years View Original


LPI Capital Bhd
(July 10, RM17.16)
Maintain neutral with an unchanged target price (TP) of RM16.70:
LPI Capital Bhd reported a second quarter of financial year 2018 (2QFY18) net profit of RM65.7 million, posting a decline of 3.4% year-on-year (y-o-y). Core profit grew marginally by 0.8% y-o-y to RM66.1 million. For the first half of FY18 (1HFY18), core net profit grew 2.9% y-o-y to RM139.8 million. Despite the improvement, earnings came in below our and consensus expectations, accounting for 41.9% and 38.6% of full-year estimates respectively.

 
The group reported an operating revenue of RM734 million in 1HFY18, climbing up by 4.8% y-o-y. Accordingly, gross earned premium followed suit with a parallel growth of 4.6% y-o-y to RM685.4 million. It is worth noting that operating revenue climbed below our growth estimate of +10.3% y-o-y for 1HFY18. This could be due to more intense competition post-liberalisation, putting pressure on premium growth.

In 2QFY18, growth in overall premium was largely driven by the motor class. It grew by 12.1% y-o-y, outperforming the fire segment which recorded only a 3.1% y-o-y growth. The motor and fire classes represented 31.1% and 43.5% of overall net earned premium respectively. We believe an improvement in the group’s overall earnings is possible given the group’s strong business presence in both segments.

LPI’s net claims incurred were recorded at 9.3% higher y-o-y in 2QFY18 at RM92.2 million. This was attributable to higher motor and miscellaneous insurance claims by +13.9% y-o-y and +42.6% y-o-y respectively. Overall, this translated into a loss/claims ratio of 41% for the group, which was 1.3 percentage points (ppts) higher y-o-y from the same period last year. Moving forward, we believe that the risk of volatile loss ratio is likely to be minimised on the group’s selective risk underwriting for its motor class following the phased liberalisation.

The group’s combined ratio recorded a net increase of 1.9ppts y-o-y, from 67.5% in 2QFY18. This was due to a surge in the group’s overall claim expenses, which translated into a 1.9ppt y-o-y drop in the group’s 2QFY18 underwriting margin. However, in 1HFY18, we noted that the combined ratio remained flat at 67.1% from last year.

The underwriting surplus grew at an average of +2.3% y-o-y in 2QFY18. The growth was driven by the fire as well as marine, aviation and transit segments, which climbed up by 10.4% y-o-y and 10.9% y-o-y respectively. This was moderated by the motor segment and miscellaneous due to higher net claims incurred in the quarter.

The group announced a 26 sen dividend, to be payable on Aug 1, 2018. This represented 75% of the group’s net profit. Comparatively, its 1HFY17 interim dividend payout ratio was 62.5% or 27 sen.

Given that earnings came in below our expectations, we revise downwards our estimates for FY18. Accordingly, we lower our FY18 operating revenue growth forecast to +7.8% y-o-y, taking into account potential contraction in premiums. Following this, our core net profit assumption shrank by 9.2% from our previous estimate. At this juncture, we maintain our forecasts for FY19, due to our assumption of a more stable operating environment next year, while remaining conservative in our revenue growth forecasts.

We opine that the group will be able to improve its performance primarily due to its strong presence in the fire and motor insurance segments. While we remain optimistic, we believe the industry’s headwinds post-liberalisation will continue to be a challenge, which will put pressure on further growth. Taking that into account, we maintain our “neutral” call on the stock, with an unchanged TP of RM16.70. We opine that the group will be able to continue to strengthen its market share in the general insurance market, supported by the group’s standing as the country’s largest property underwriter. This will likely provide a strong revenue base for the group moving forward. — MIDF Research, July 10

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