LPI Capital Bhd
(March 20, RM15.04)
Initiating coverage with neutral call and a target price of RM13.18. Our “neutral” rating is premised on the defensive qualities of LPI Capital having been priced in while the share price has already surged 20% since late January this year, after the company’s announcement of a one-for-two bonus issue to boost its liquidity.

We expect dividend payouts of close to 70% of its profit after tax for financial year 2015 (FY15) and FY16. This will translate into a decent dividend yield of 3.4% for both FY15 and FY16.

LPI is a general insurance player, with fire insurance contributing 37.6% of its portfolio in terms of its gross written premium. Fire insurance is a lucrative segment in Malaysia due to the absence of lumpy claims as compared to insurance policies covering major catastrophe risks such as earthquakes, and favourable tariff rates. 

Although the fire tariff structure will be abolished in the future, we expect contributions from the fire segment for LPI to still grow, albeit at lower margins. 

This is due to its expanding agency network and its relationship with Public Bank Bhd for bancassurance business which is expected to grow in tandem with the bank’s loan book.

As part of LPI’s strategy to carefully select the risks to underwrite policies, the group focuses on the less risky segments within the motor insurance space such as  comprehensive private car insurance. It also underwrites policies for marine, aviation and transit, engineering (construction), workmen’s compensation, personal accident, liability, medical, bond and miscellaneous accident classes. 

Hence, its diversified portfolio is expected to mitigate the impact of detariffication for motor and fire insurance.

LPI has continuously achieved positive growth in its net earned premium and net profit for more than a decade. 

Since FY04, the company has enjoyed a 10-year compound annual growth rate for net profit of 17.7%, driven by the expansion of the local and global economy and the increasing awareness of protection among individuals and businesses in Malaysia.

The group has recorded lower-than-industry ratios for claims, commission and management expenses as well as the overall combined ratio since FY09 thanks to its prudent underwriting practices and tight control on expenses. — MIDF Amanah Research, March 20

This article first appeared in The Edge Financial Daily, on March 23, 2015.