Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 3 Apr 2020, 11:03 AM


LPI Capital Bhd - Cutting Through the Waves

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We came away from a meeting with management, feeling positive. If the upcoming fire insurance review were to conclude adversely, we believe it would not be overly detrimental to the group’s portfolio, as it does not affect its sizeable non-housing policies. Meanwhile, product diversification and growing its agency base will help to cushion it against market headwinds. Maintain OUTPERFORM and TP of RM15.90.

Brushing off the heat. The industry is keeping an eye on Bank Negara’s liberalisation review on the fire class insurance, likely to be presented by end of Jun 2020. Currently, fire insurance makes up c.40% of LPI’s gross earned premium (GEP) and c.65% of underwriting surplus before management expenses. However, we gathered that loss of business would not be as detrimental as expected. For one, the segment is also heavily exposed to non-housing fire policies (i.e. industrials) which are typically subject to below-tariff rates and hence not affected by the review.

Additionally, having partially implemented premium rate adjustments (- 30%) in 2017 as opposed to the complete detariffication as with motor, it is likely that Bank Negara will not entirely deregulate this insurance class owing to its high value to the insurance sector. Management concurs that impact, if any, would be gradual. That being said, referred business from Public Bank would still support this segment’s GEP despite adverse market conditions.

Other key segments could be doing better. For motor insurance (c.20% GEP), margins appears to have stabilised in a liberalised environment, with a FY19 net claims incurred ratio of c.75% (from 50- 60%). Meanwhile, sales could be driven by national car launches this year. On the other hand, the 22% YoY decline in the Miscellaneous segment’s underwriting surplus was stemmed by unfavourable rates from now scrapped products. We anticipate FY20 to feature less of such products with managements’ more detailed review of offerings, while the possible resurgence of national infrastructure projects could be a plus for this segment.

Spreading wide. The near-term insurance industry landscape could be challenging arising from economic uncertainties stemmed by the ongoing Covid-19 pandemic and geopolitical instabilities. To shield itself, the group looks to offer a greater range of products (i.e. medical, health, liabilities) while widening its agency force (targeted agent base growth of 10% annually).

Maintain OUTPERFORM and TP of RM15.90. Keeping earnings unchanged, we maintain our 3.0x FY20E PBV valuation (close to the stock’s 3-year forward average), a level which we believe the market can support as the stock has firm backing from Public Bank. While LPI’s projected earnings growth (2-4%) may not be exciting, we find the stock attractive for its stable outlook and well-guarded business model amidst market volatilities. Further, its 5% dividend yield could appeal to yield-seeking investors assuming the group maintains its 2-year historical payout of c.86%.

Risks to our call include: (i) lower premium underwritten, (ii) higherthan-expected claims, and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 18 Feb 2020

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