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LPI Capital Bhd

WE favour LPI (Fundamental: 2.1/3, Valuation: 1.65/3), Malaysia’s leading general insurer and largest listed insurance company by market cap, for its stable growth, good margins and dividend yields. It operates in three markets: Malaysia and Singapore through its wholly-owned Lonpac Insurance Bhd and Cambodia through its 45%-owned Campu Lonpac Insurance Plc. The company is majority owned by Tan Sri Teh Hong Piow, the chairman of Public Bank.

Underlying fundamental is solid all round. LPI has the advantage of leveraging on Public Bank’s solid loans growth for its business — gross written premiums was up a strong 11.5% y-y in 1H15. Meanwhile, its prudent risk management results in a continuous reduction in net claims ratio, the lowest in the industry at only 44.6% in 2014.

To recap, revenue rose 4.8% y-y in 1H15 to RM596.5 million, while net profit increased 40.5% to RM142.9 million, boosted by sharp increase in gains on disposal of investments totalling RM39.2 million. Net margin for the trailing 12-month period was well above the industry average, of about 10%, at 27.1%. The company also has one of the industry’s highest returns on equity, at 20.35%.

LPI has paid dividend every year since listing in 1993. Dividends amounted to 75 sen per share last year. It paid an interim dividend of 20 sen per share — the same as that for 1H14 — despite a 1-for-2 bonus issue that was completed in March 2015. Assuming the same level of dividends as 2014, shareholders will earn a net yield of 5.7%.

The company intends to expand the local takaful business as well as its Cambodian operations, where insurance penetration levels are low. On the other hand, LPI faces challenges in the ongoing industry liberalization, which will see competition from large foreign insurers, and slowdown in consumer spending.

Valuations wise, LPI trades at decent price-to-book value of 2.6 times and P/E of 13.3 times. By comparison, its closest peer, Syarikat Takaful trades at 20.4 times P/E, and 5 times price-to-book.

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This article first appeared in digitaledge Daily, on September 10, 2015.

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