Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI). Valuation continues to be uncompelling with the stock trading at 3.2x to our FY19 BV/share estimate. We revised our fair value to RM15.60/share from RM15.30/share, pegging the stock to FY19 P/BV of 3.0x supported by an ROE of 15.3%. Our FY19/FY20 earnings projections have been raised by 5.3%/2.8% after tweaking our assumptions for claims and management expense ratios lower.

• LPI reported a lower core net profit of RM84mil (-8.4%QoQ) in 4QFY18 underpinned by lower investment income and higher net claims.

• For 12MFY18, the group delivered a flattish core net profit of RM314mil (+0.1%YoY). Higher net earned premium was offset by higher claims (largely from motor insurance) and management expenses. Nevertheless, cumulative core earnings were slightly above our expectations, accounting for 108.3%, largely due to better-than-expected claims and management expense ratios. Against street numbers, the group’s cumulative earnings made up for 101.4% of consensus projected profit.

• 12MFY18 gross written premium (GWP) grew modestly by 3.4%YoY driven by growth of its key segments, motor and fire insurance. This was also contributed by an improvement in the growth of medical insurance while engineering insurance recorded a decline in premiums due to the slowdown in infrastructure projects. Nevertheless, 12MFY18 NEP still grew 9.5%YoY as a result of a higher retention ratio of 65.8% (12MFY17: 61.6%). 12MFY18 saw lower ceding of motor premiums to reinsurers resulting in an increase in risk retention.

• Phase 2 of market liberalisation is already underway. We understand that in 2019, BNM will review the progress of Phase 1 and 2 of the liberalisation. This is likely to take place after June 2019 when BNM will assess the readiness of consumers and industry players for further liberalisation in the sector. Hence, it is possible for the fire tariff to be fully liberalised after the review.

• Recall that motor tariff has already been fully liberalised leaving only fire products which are still subjected to tariff rates. The full liberalisation of the pricing for fire insurance is anticipated to see a stiffer competition and pressure on the underwriting margins for products in this segment in the near term.

• The group’s underwriting profit before management expenses for motor fell in 12MFY18. We believe that the rise in claims ratio and competitive pressure in the pricing of motor insurance after the detariffication have contributed to this decline.

Source: AmInvest Research - 30 Jan 2019