LPI Capital Bhd
(Oct 11, RM16.52)
Maintain buy with an unchanged target price (TP) of RM18.90: LPI Capital Bhd saw a favourable quarter in the third quarter of financial year 2018 (3QFY18), with net profit coming in at RM91.8 million (+40% quarter-on-quarter [q-o-q]; flat year-on-year [y-o-y]).
Drivers in 3QFY18 were mainly stronger net earned premium growth, lower net claims incurred and higher overall investment income against 2QFY18. In our view, the nine months of FY18 (9MFY18) net profit of RM230 million (-0.3% y-o-y) is within our expectations, accounting for 71% of our FY18 estimate (FY18E) net profit estimate of RM322.2 million.
We expect 4QFY18 to perhaps repeat the performance of 3QFY18, on the back of management’s move to exercise more caution in motor risk underwriting as well as continue to focus on the roll-out of more comprehensive fire insurance products, amid a more liberalised market.
LPI Capital staged a rebound in 3QFY18 net profit, rising by almost 40% q-o-q though on a y-o-y was flat. Meanwhile, 9MFY18 net profit of RM230 million was marginally lower y-o-y, largely due to higher claims and weaker margins. Overall, results were within our expectations, accounting for 71% of our FY18E estimate of RM322.2 million. In 3QFY18, we saw stronger motor net earned premium growth, rising by 4.3% q-o-q (as a result of the strong auto sales during the tax holiday period of June to August 2018) while the miscellaneous segment was up 18.8% q-o-q. On the other hand, the fire and marine/aviation/transport (MAT) segment was down by 2.7% q-o-q and 5.9% q-o-q. On a more positive note, we saw an improving trend in the group net claims incurred ratio from 47.1% in 1QFY18 to 41% in 2QFY18 and 37.2%% in 3QFY18 (with 9MFY18 averaging 41.6% versus 40% in 9MFY17), largely underpinned by recovery in the motor segment.
The fire segment contributed 42% of 9MFY18’s net earned premium (NEP), followed by the motor segment at 31% and MAT at 2.1%. The fire segment accounted for about 65% of 9MFY18 underwriting surplus.
We reiterate our “buy” recommendation and maintain our TP at RM18.90, based on a 3.2 times FY19E price-to-book value target. We maintain our FY18E to FY20E earnings forecasts for LPI Capital, which are underpinned by the following key assumptions: gross written premium growth at 2% to 5%; NEP growth at 5% to 5.6%; and net claims ratio at 38% to 39%. Downside risks are price competition, spike in claims, higher fraud cases and weaker premium growth. — Affin Hwang Capital Research, Oct 11