Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI) with an unchanged fair value of RM17.80/share. This is based on 2.5x P/BV (5-year historical average P/BV) on FY18 BV. The stock continues to trade at a rich valuation of 2.6x to FY18 BV/share. We make no changes to our earnings estimate.

• LPI reported a net profit of RM92mil (+35.4%QoQ) as 3QFY17 saw a higher release of unearned premium reserves (UPR).A revision in accounting estimate was made in relation to the calculation of UPR for all classes of business except for marine, aviation and transit insurance. This resulted in the groups' net earned premium (NEP) and after tax profit to rise by RM34.2mil and RM18.0mil respectively for 9MFY17 using the new calculation method compared to the previous one. Stripping out the one-off impact from the change in accounting estimate for UPR and gains from realisation of equity investments, LPI reported a core net profit of RM210mil for 9MFY17 (+2.1%YoY) which met our expectations, making up 70.3% of our estimate. Nevertheless, its recurring earnings continued to be slightly below consensus numbers, accounting for 68.4% of street forecast.

• The group reported a higher net earned premium (NEP) of 11.9%YoY for 9MFY17, contributed by the premium growth from fire insurance and the release of UPR. Excluding the change in estimate for UPR, its NEP growth for 9MFY17 would be lower at 5.7%YoY, in line with our estimate. Reported NEP growth for motor jumped 8.8%YoY. This was largely driven by the release of UPR. Excluding this impact, the underlying growth of NEP for motor insurance continued to be subdued.

• The group's wholly-owned subsidiary Lonpac Insurance reported an improved underwriting profit of RM212.6mil (+13.4%YoY) in 9MFY17.

• The group's key operating ratios remained stable with a combined ratio of 66.5% in 9MFY17 vs. 67.3% in 9MFY16. Management and commission expense ratios were kept steady at 22.0% and 4.5% respectively. Meanwhile, claims ratio fell slightly to 40.0% for 9MFY17 (9MFY16: 40.5%) Management continues to be conservative and prudent in underwriting with a retention ratio of 60.3% for 9MFY17. 9MFY17 underwriting margin remained healthy at 33.5%.

• No further developments from the imposition of a RM8.3mil fine by the Malaysia Competition Commission (MyCC) on the group. Recall that LPI, together with 21 other PIAM members, were earlier fined by MyCC for the alleged infringement of fixing parts trade discounts and labour rates for repair workshops.

• No dividend has been proposed in 3QFY17. Thus far, a 27 sen/share single dividend has been declared for 9MFY17. We expect another 43.0 sen/share dividend to be declared in 4QFY17, bringing the total to 70.0 sen/share (payout: 49.2%) for FY17.

Source: AmInvest Research - 10 Oct 2017