LPI Capital Bhd
(April 16, RM15.68)
Maintain market perform with a higher target price (TP) of RM16.50: LPI Capital Bhd’s first quarter of financial year 2019 (1QFY19) core net profit of RM77.2 million is within our and consensus expectations — 23% of both full-year estimates. The absence of dividends is also within expectations. The group typically declares dividends twice a year.

Year-on-year, 1QFY19 revenue grew 3% on better gross premiums from the group’s key fire and motor insurance segments (+4%), offset by a poorer performance by the marine, aviation and transit (-18%) as well as miscellaneous (-16%) insurance segments. The net earned premium grew 9% from a higher retention ratio (65.8%; +3.9 percentage points [ppts]), but operating profit expanded only 5% following a higher combined ratio incurred (73.9%; +0.7 ppt). This was an accumulation of a higher claims incurred ratio (47.4%; +0.3 ppt as improved motor claims were negated by higher miscellaneous claims) and net commission ratio (+5.2%; +1.6 ppts), but a lower management expense ratio (21.2%; -1.3 ppts) was registered. Core net profit for 1QFY19 was at RM77.2 million (+6%).

Quarter-on-quarter, 1QFY19 revenue was flattish as a 3% decline in general insurance top line — mainly on lower net fire insurance premiums — was negated by an about 87% jump in investment income. However, a higher combined ratio of 73.9% (+9.6 ppts) was led by greater net claims from the marine, aviation and transit as well as miscellaneous insurance businesses. This translated into a lower 1QFY19 net profit by 8%, supported by better effective taxes of 19.2% (-5 ppts).

We believe the group’s trajectory — particularly its lion’s share of the fire insurance segment — could still be backed by Public Bank’s mortgage growth rates, fuelled by their wide agency distribution network. However, concerns about maintaining a viable combined ratio — which we expect to hike closer towards about 70% levels — are looming ahead of an upcoming review of fire class insurance in 2019, likely leading to a competition-driven margin compression.

However, the motor segment still demonstrates encouraging transaction volumes, indicating the the group’s strength in this segment following its detariffication. On miscellaneous items, the group is looking towards deleveraging its exposure in the construction and engineering sectors by venturing into other classes — medical and workmen compensation.

After releasing the results, we maintained our earnings estimates for FY19 and FY20. We also maintained our “market perform” rating with a higher TP of RM16.50 from RM16.30 previously. Our valuation is based on an unchanged blended price-earnings ratio (PER) and price-to-book value (PBV) of 19 times and three times on a rolled-over FY20 estimate base year. The valuations are based on the stock’s respective +1 standard deviation over the three-year mean of PER and PBV.

Currently, we believe sentiments for the stock could be helmed by the sizeable financial institution Public Bank’s solid backing, which may provide comfort for the group’s operations’ sustainability. Dividend returns of 4.6% and 4.7% for FY19 and FY20 could be decent enough for investors as well. The risks to our call include a higher or lower premium underwritten, higher- or lower-than-expected claims and a higher- or lower-than-expected management expense ratio. — Kenanga Research, April 16