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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 27 Nov 2020, 11:02 AM

 

LPI Capital Nhd - MCO Impact Negligible

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1HFY20 NP of RM155m is within expectations as impact of the MCO in 2QFY20 was marginal. Gross earned premiums was resilient as is investment income with an added RM12m in capital gains. We reiterate our OP call with unchanged TP of RM15.90.

In line. 1HFY20 Core Net Profit (CNP) of RM155m made up 47%/51% of our/consensus full-year expectations. An interim DPS of 28.0 sen was declared (in line).

YoY, 1HFY20 operating revenue of RM804m grew +3% on the back of resilient gross earned premiums (GEP) growing at a similar pace. The positive growth was underpinned by strong GEP performance from the Fire and Motor segment, growing at +2% and +6%, respectively. The marginal rise in Net Earned Premium (+0.2%) was due to a double dip in both Retention ratio and Combined ratio (with claims incurred ratio and net commission ratio falling by 160bps mitigated by management expenses seeing slight 50bps untick) which fell 190bps and 130bps to 65% and 72% respectively. Total revenue kept a similar pace to operating revenue given that investment income was resilient with +2% growth while commission income rebounded +18% with an added capital gains of RM12m for the period under review.

QoQ, as expected, saw dip in performance as total revenue fell marginally by 1% to RM308m. The fall was further compounded by a fall in investment income by 50%. On a positive note, GEP and NEP grew at +4% and +6%, respectively, owing to both Retention and Combined Ratio up by 140bps and 80bps to 66% and 72%, respectively. NEP for the quarter was driven by the Fire segment at +21%, (most likely riding on Public Bank growing its mortgage business with the RMCO in early June) - with the others registering negative growth. Net profit was flattish at RM77m due to commission and management expense falling 2% and 5%, respectively.

Risks manageable. Despite the uncertainties ahead with business and consumer confidence impacted by the on-going pandemic and economic woes, LPI believes the impact on claims will be relatively manageable. Though the other segments (motor, marine, aviation & transit, and miscellaneous) are more susceptible to volatile market conditions, we see LPI as having a more sustainable business model given its banca partnership with Public Bank.

Post results, our FY20E earnings are unchanged as results are in line.

Maintain OUTPERFORM with unchanged TP. Keeping earnings unchanged, our TP is unchanged at RM15.90 as we rollover our valuations to FY21E applying a 2.9x PBV (previously 3.0x FY20 PBV) valuation (implying a 5-year mean vs a 3-year mean previously). We believe the worst is over given the RMCO in June with recoveries expected in 2H20 underpinned by its Fire Segment. 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. Furthermore, its 5% dividend yield could appeal to yield-seeking investors assuming the group maintains its 2-year historical pay-out of c.86%.

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

Source: Kenanga Research - 18 Aug 2020

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