LPI Capital Bhd
(Jan 29, RM20.66)
Downgrade to neutral from buy with target price (TP) of RM19.90: LPI Capital Bhd’s (LPI) RM223 million financial year ended Dec 31, 2014 (FY14) core net profit (+11% year-on-year) met 100% of our and consensus estimates. This excluded a lumpy RM60 million realised gain from a long-term equity investment made in the fourth quarter (4Q). Underwriting (UW) margins in general insurance subsidiary Lonpac Insurance surged 120 basis points to 31.2% (from 30%). More fire insurance (38% of its portfolio) and sustained overall loss ratios offset a lacklustre 4% premium growth, an industry trend on competition and a tightening credit cycle. Claims ratio at 44% (FY13: 45.5%) implied a more diversified risk portfolio and expense ratio at 19% (FY13: 18.2%) reflected cost controls. UW margins for fire improved to 80% (FY13: 73%) as fire net claims ratio improved significantly to 14% (FY13: 21%). The business intelligence system will benefit shareholders as the insurance stock was highly illiquid. 

Lonpac has a combined 62% exposure to fire and motor premiums. Given LPI’s above industry exposure to fire insurance, we estimate gross claims exposure to the East Coast floods at  approximately RM20 million. Yet, we expect the net impact on earnings to be minor (2% to 3% of FY15 earnings) as it is well covered by reinsurance and claims provisioning.

We lower our FY15 to FY16 forecast (FY15F/FY16F) earnings per share by 8% and 18% respectively as we cut revenue growth to 6% and expect higher loss ratios for FY16 on a tougher operating environment and more challenges post fire and motor detariffication in 2016.  While we like LPI’s profitable product mix, we see limited upside on its lacklustre earnings growth prospects and dividend payouts. — RHB Research, Jan 29

This article first appeared in The Edge Financial Daily, on January 30, 2015.