Investment Highlights

• We maintain our HOLD call on LPI Capital (LPI) as valuation on the stock remains stretched with the stock trading at 3.2x 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 existing shares. We raise our fair value to RM15.60/share post-bonus issue from RM15.10/share. This is based on a higher P/BV of 3.1x (previously: 3.0x) on FY18 BV supported by an ROE of 16.7% after adjusting the cost of equity assumption in our Gordon growth model. In view of the fact that it is only the first quarter’s results, we keep our forecast unchanged.

• LPI reported a modest growth in core net profit of 3.3%YoY to RM73mil in 1QFY18. The increase in net profit was attributed to a higher NEP from a growth in premiums and a higher retention ratio, which were partially offset by an increase in net claims, commission and management expenses. Its higher retention ratio of 61.9% was in line with our estimate for FY18.

• The group's core earnings in 1QFY18 were within expectations, accounting for 22.3% of our and 22.2% of consensus estimate.

• 1QFY18 NEP was higher by 20.8%YoY for 1QFY18, contributed by a growth in GEP (+9.9%YoY) and a higher retention ratio.

• The combined ratio in 1QFY18 rose to 73.2% compared to 68.1% in 1QFY17. Contributing to the increase was higher claims and commission ratio. The group's overall claims ratio climbed to 47.1% in 1QFY18. This was attributed to higher incurred claims for motor insurance as well as a non-repeat release of reserves from Malaysian Motor Insurance Pool (MMIP) as in the 1QFY17. The increase in motor claims was consistent with the general insurance industry trend. Arising from a higher retention ratio and consequently leading to a lower commission income against commission expenses, the group’s commission ratio rose to 3.6% in 1QFY18. Meanwhile, its management expense ratio improved to 22.5% in 1QFY18, reflecting controlled expenses.

• The group has fully repaid its financial lease liabilities of RM0.9mil.

• The day 1 impact of MFRS 9 was minimal and has resulted in changes to the opening fair value reserves (1 Jan 2018) as a result of the reclassification of financial assets of RM2mil. The group’s opening retained earnings (1 Jan 2018) has been enhanced by RM4mil due to the adoption of MFRS 9.

• 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 early stage of implementation. Effective implementation date of MFRS 17 is 1 Jan 2021.

• No dividend has been proposed in 1QFY18.

• The bonus issue exercise, which was completed on 12 April, has increased the group's share capital by 20% from 331.9mil to 398.4mil shares. A total of 66.4 mil bonus shares of RM1.00 each have been issued through the capitalisation of RM6.25mil from its share premium account and RM60.1mil from its retained earnings.

Source: AmInvest Research - 27 Apr 2018