Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI) as valuation remains stretched with the stock trading at 3.9x to our FY18 BV/share estimate. Our BV/share estimate has already incorporated the impact on an enlarged capital after the group's proposed bonus issue of 1 for every 5 shares. We revised our fair value to RM18.20/share from RM17.80/share. This is based on 3.0x P/BV (3-year historical average P/BV) on FY18 BV and higher ROE of 16.7% (previously 14.0%) as we raised our earnings for FY18/19 by 5.6%/5.7% to account for a higher net earned premium (NEP).

• LPI reported a lower net profit of RM83mil (-9.6%QoQ) in 4QFY17 attributed to a decline in NEP, investment and commission income. This led to a 12MFY17 core net profit of RM293mil (+2.1%YoY) after stripping out a one-off impact from the change in accounting estimate for unearned premium reserves (UPR) and gains from realisation of equity investments. Recall that in 3QFY17, a revision in accounting estimate was made in relation to the calculation of UPR. This resulted in the groups' NEP and after tax profit to rise by RM35.8mil and RM18.0mil respectively for 12MFY17. The group's core earnings were within expectations, accounting for 98.0% of our and 95.1% of consensus estimate.

• The group reported a higher NEP of 10.8%YoY for 12MFY17, contributed by the premium growth of fire and motor insurance and the release of UPR. Excluding the change in estimate for UPR, its NEP growth for 12MFY17 would be lower at 6.1%YoY, close to our estimate of 5.5%YoY.

• The group's performance remained steady with a stable combined ratio of 64.7% in 12MFY17. Claims ratios for key segments continued to be steady QoQ. The group's overall claims ratio continued to hold up at 38.5% in FY17 vs. 38.3% in FY16. Meanwhile, its management expense ratio improved marginally to 20.9% in FY17. Net commission ratio continued to be kept low at 5.2% in FY17, in line with our estimate. Moving forward, we continue to project a retention ratio of close to 60.0% for the group.

• The group highlighted that the estimated impact from the adoption of MFRS 9 was minimal (RM2.3mil), largely from the changes in fair value reserves as result of the reclassification of financial assets. Moving forward, MFRS 17 will replace MFRS 4, and this is expected to have a larger impact on insurance companies than MFRS 9. The group is assessing the impact of MFRS 17 which is still in the infancy stage of implementation.

• A second interim dividend of 45.0 sen/share has been proposed. This brings the total dividends to 72.0 sen for FY17, close to our estimate of 70.0 sen/share.

• The proposed bonus issue is expected to increase the group's share capital by 20% from 331.9mil to 398.4mil shares. A total of 66.4mil bonus shares of RM1.00 each will be issued and this will be through capitalisation of RM6.25mil from its share premium account and RM60.1mil from retained earnings. It is expected to dilute FY18 EPS and BV/share by 17.5%. The proposed bonus is expected to be completed by 2QFY18.

Source: AmInvest Research - 11 Jan 2018