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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Wed, 21 Aug 2019, 9:50 AM

 

LPI Capital Bhd - 2Q19 Within Expectations

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6M19 Net Profit of RM147.9m (+7%) and interim dividend of 27.0 sen per share are within expectations. Immediate concerns could arise from the coming 2019 fire insurance review, given the group’s sizeable exposure (c.40% of total revenue). Nonetheless, this could be mitigated by improving presence in other insurance classes. Maintain MARKET PERFORM and TP of RM16.50.

6M19 as expected. 6M19 Net Profit of RM147.9m made up 44% of both our and consensus full-year estimates. We deem this to be within expectations as the 1HFY periods typically make up c.45% of full-year numbers. The declared interim dividend of 27.0 sen is also deemed to be within expectations.

YoY, 6M19 revenue rose by 6% to RM779.6m thanks to better gross premiums yielded across all segments, mainly led by the key Fire Insurance business (+12%). Net earned premium grew by 10% on the back of an improved retention ratio (67.1%, +2.7ppt) but operating profit only expanded by 6% following a higher combined ratio incurred (73.1%, +1.9ppt). Higher claims incurred (46.1%, +2.1ppt) was dragged by more incidents seen in the Miscellaneous Insurance segment while expense ratios (i.e. commission and management) eased. All in, 6M19 Net Profit increased to RM147.9m (+7%).

QoQ, 2Q19 revenue saw flattish decline (-2%) stemmed by lower investment income (-45%), cushioned by higher gross premiums (+3%). The combined ratio for the quarter stood at 72.3% (-1.6ppt) mainly on the back of lower claims incurred for the period. Following higher effective tax rate of 23.6% (+4.4ppt), 2Q19 net earnings dropped to RM70.8m (-8%).

Keeping all fronts in check. Fire insurance should still helm LPI’s performance in the long run, tapping onto Public Bank’s market leading presence in the mortgage space alongside their wide agency distribution network. This could come in the forefront against headwinds arising from the coming review of fire class insurance. To recap, the segment accounts for c.40% of gross earned premiums and c.65% of underwriting surplus before management expenses. On the other hand, the motor segment continues to demonstrate encouraging transaction volumes, indicating the strength of the group in this segment following its detariffication. On Miscellaneous items, growth avenue could come from the group’s venture into other classes (i.e. medical, workmen compensation) while the potential revival of infrastructure projects could awaken and rejuvenate business in the construction and engineering sectors, currently in a lull.

Post-results, we leave our FY19E/FY20E earnings unchanged.

Maintain MARKET PERFORM and TP of RM16.50. Our valuation is based on an unchanged blended 19.0x/3.0x FY20E PER/PBV. The valuations are based on the stock’s respective +1SD over the 3-year mean of PER and PBV. Currently, we believe the sentiment for the stock could be steered by the solid backing from a sizeable financial institution (i.e. Public Bank) which may provide comfort on the sustainability of the group’s operations. Dividend returns of 4.5%/4.6% for FY19/FY20 could be decent enough for investors as well.

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

Source: Kenanga Research - 16 Jul 2019

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