LPI Capital Bhd
(Jan 30, RM16.32)
Maintain hold with a higher fair value (FV) of RM15.60: LPI Capital Bhd’s valuation continues to be uncompelling with the stock trading at 3.2 times to our financial year 2019 (FY19) book value/share estimate. We revised our FV to RM15.60 per share from RM15.30 per share, pegging the stock to FY19 price-to-book value of three times supported by a return on equity of 15.3%. Our FY19 and FY20 earnings projections have been raised by 5.3% and 2.8% respectively after tweaking our assumptions for claims and management expense ratios lower.
LPI reported a lower core net profit of RM84 million in the fourth quarter ended Dec 31, 2018 (4QFY18) underpinned by lower investment income and higher net claims. For FY18, the group delivered a flattish core net profit of RM314 million. Higher net earned premium was offset by higher claims (largely from motor insurance) and management expenses. Nevertheless, cumulative core earnings were slightly above our expectations, accounting for 108.3%, largely due to better-than-expected claims and management expense ratios. Against street numbers, the group’s cumulative earnings made up for 101.4% of consensus projected profit.
FY18 gross written premium grew modestly by 3.4% year-on-year (y-o-y) driven by growth in its key segments, motor and fire insurance. This was also contributed by an improvement in the growth in medical insurance while engineering insurance recorded a decline in premiums due to the slowdown in infrastructure projects. Nevertheless, FY18 net earned premium still grew 9.5% y-o-y as a result of a higher retention ratio of 65.8%. FY18 saw lower ceding of motor premiums to reinsurers resulting in an increase in risk retention.
Phase Two of market liberalisation is already underway. We understand that in 2019, Bank Negara Malaysia (BNM) will review the progress of Phases One and Two of the liberalisation. This is likely to take place after June 2019 when BNM will assess the readiness of consumers and industry players for further liberalisation in the sector. Hence, it is possible for the fire tariff to be fully liberalised after the review.
Recall that the motor tariff has already been fully liberalised leaving only fire products which are still subject to tariff rates. The full liberalisation of the pricing for fire insurance is anticipated to see a stiffer competition and pressure on the underwriting margins for products in this segment in the near term.
The group’s underwriting profit before management expenses for motor fell in FY18. We believe that the rise in claims ratio and competitive pressure in the pricing of motor insurance after the detariffication have contributed to this decline. — AmInvestment Bank, Jan 30