This article first appeared in The Edge Financial Daily on January 12, 2018

LPI Capital Bhd
(Jan 11, RM19.60)
Maintain buy with an unchanged target price (TP) of RM22.00: LPI Capital Bhd’s fourth quarter of financial year 2017 (4QFY17) appeared lacklustre, as net profit shrank by 10% quarter-on-quarter (q-o-q) due to lower investment gains. For FY17, its core net profit (CNP) of RM309.3 million (+6.1% year-on-year [y-o-y], excluding a RM150 million disposal gain on securities in FY16) was in line with our and consensus estimates. The operating environment in FY17 was challenging for LPI, but nonetheless, the group maintained a healthy gross written premium growth of 11.2% y-o-y. A second interim dividend of 45 sen (4QFY16: 55 sen) was proposed and meanwhile, a bonus issue of one-for-five for shareholders was announced. We reiterate “buy” with an unchanged TP of RM22.00.

LPI saw its FY17 CNP and core profit before tax rise by 6.1% and 9.6% y-o-y, respectively, in the absence of significant investment gains (a RM150.4 million gain on securities disposal took place in FY16). To recap, in FY17, LPI revised its accounting estimates, which resulted in a higher unearned premium reserves calculation, which was reflected in the profit and loss statement as higher net earned premium by an amount totalling RM35.8 million. Nonetheless, LPI’s FY17 headline pre-tax profit and net profit were down by 22.2% and 28.2% y-o-y, respectively. Its underwriting profit continued to see a healthy growth of 10.6% y-o-y for FY17 (on the back of a low combined ratio of 64% vs 63.7% in FY16) while 4QFY17 saw a growth of 9.6% q-o-q and 2.4% y-o-y.

The fire segment remained the key driver, contributing 44.2% to FY17’s net earned premium (NEP), while registering a growth of 16.5% y-o-y. Its motor and marine, aviation & transit segments remained lacklustre due to declining vehicle sales and a weaker oil and gas sector. The FY17 net claims ratio was relatively unchanged at 38.5% vs 38.3% in FY16 despite being adversely affected by additional gross claims of RM43.3 million from the floods in Penang (in November 2017). Overall, LPI’s FY17 gross written premium and NEP grew by 11.2% and 10.8% y-o-y on expansion of its agency force and contributions from global partners.

We continue to like LPI for its steady premium growth, disciplined underwriting, and superior margins. We reiterate our “buy” recommendation at our TP of RM22.00 (based on a 3.34 times 2018 price-to-ok value ratio target). — Affin Hwang Capital Research, Jan 11