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Kenanga Research initiates coverage on LPI Capital with buy call

Written by Kenanga Research
Monday, 03 May 2010 08:56


KUALA LUMPUR: Kenanga Research has initiated coverage on LPI CAPITAL BHD [] with a buy recommendation at RM15.04 and target price RM16.80, and said it favours LPI the most among general insurers in Malaysia due to its well-diversified business portfolio enabling the company to minimise its operating risks and generates the highest return on equity (RoE) to reward shareholders.

The research house said the auto insurance segment is expected to turn around in 2010-11 with the proposed increase in premium rates and the change of motor tariff structure, which is a re-rating catalyst.

'We have not factored in the potential tariff hike in this report, however, we estimate every 5% increase in net premium, could increase LPI's earning by 9%,' it said.

The research house said LPI has multiple distribution channels including its own agency network and tapping into Public Bank's 250 branch networks.

'We believe its faster-than industry's organic gross premium growth rate of 15%-16% is achievable,' it said.

Kenanga Research said historically, LPI's premium has grown at a CAGR of 15% for the last 10 years.

'We estimate LPI now trades at 12.7 times FY11 PER, offers 6.2% net dividend yield and we forecast RoE of 17.2%; which is better than most of the banking stocks.

'We believe its business model of growing revenues at the calculated risk should sustain its earning growth of 12%-14% over next two years and efficient capital structure do offer a solid dividend yield story to investors,' it said.

The research house said LPI deserved a valuation premium given stronger growth, higher margin, low investment risk, better market position; whilst the downside is well cushioned by its 6.2% net dividend yield.


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