This article first appeared in The Edge Financial Daily on July 17, 2019

LPI Capital Bhd
(July 16, RM16.18)
Maintained market perform with an unchanged target price of RM16.50: LPI Capital Bhd’s cumulative six months ended June 30, 2019 (6MFY19) net profit of RM147.9 million (7%) and interim dividend of 27 sen per share were within expectations. Immediate concerns could arise from the coming 2019 fire insurance review, given the group’s sizeable exposure. Nonetheless, this could be mitigated by improving presence in other insurance classes.

6MFY19 net profit of RM147.9 million made up 44% of both our and consensus full-year estimates. We deem this to be within expectations as the first half of financial year periods typically make up around 45% of full-year numbers. The declared interim dividend of 27 sen is also deemed to be within expectations.

Year-on-year, 6MFY19 revenue rose by 6% to RM779.6 million thanks to better gross premiums yielded across all segments, mainly led by the key fire insurance business (+12%). Net earned premium grew by 10% on the back of an improved retention ratio (67.1%, +2.7 percentage points [ppts]) but operating profit only expanded by 6% following a higher combined ratio incurred (73.1%, +1.9ppts). Higher claims incurred (46.1%, +2.1ppts) was dragged down by more incidents seen in the miscellaneous insurance segment while expense ratios (for example commission and management) eased. All in, 6MFY19 net profit increased to RM147.9 million (+7%).

Quarter-on-quarter, 2QFY19 revenue saw flattish decline (-2%) stemmed by lower investment income (-45%), cushioned by higher gross premiums (+3%). The combined ratio for the quarter stood at 72.3% (-1.6ppts) mainly on the back of lower claims incurred for the period. Following higher effective tax rate of 23.6% (+4.4ppt), second quarter of 2019 (2QFY19) net earnings dropped to RM70.8 million (-8%).

Fire insurance should still helm LPI Capital’s performance in the long run, tapping onto Public Bank’s market leading presence in the mortgage space alongside their wide agency distribution network. This could come in the forefront against headwinds arising from the coming review of fire class insurance. To recap, the segment accounts for around 40% of gross earned premiums and around 65% of underwriting surplus before management expenses.

On the other hand, the motor segment continues to demonstrate encouraging transaction volumes, indicating the strength of the group in this segment following its detariffication. On miscellaneous items, growth avenue could come from the group’s venture into other classes (which are medical, workmen compensation) while the potential revival of infrastructure projects could awaken and rejuvenate business in the construction and engineering sectors, currently in a lull.

Our valuation is based on an unchanged blended 19 times/three times financial year 2020 (FY20) price-earnings ratio (PER)/price-to-book value (PBV). The valuations are based on the stock’s respective +1 standard deviation over the three-year mean of PER and PBV.

Currently, we believe the sentiment for the stock could be steered by the solid backing from a sizeable financial institution (for example Public Bank) which may provide comfort to the sustainability of the group’s operations. Dividend returns of 4.5%/4.6% for FY19/FY20 could be decent enough for investors as well.

Risks to our call include: i) higher/lower premium underwritten; ii) higher/lower-than-expected claims; and iii) higher/lower-than-expected management expense ratio. — Kenanga Research, July 16