Profit Boost From Change in Accounting Estimates

LPI had a change in accounting estimates on its Unearned Premium Reserves (UPR) which resulted in a financial impact of +RM23.3m on 9M17 pre-tax profit. Otherwise, we reckon that 9M17 net profit was below our original 2017 forecast of RM303m by circa 8.7%. We have revised upwards our 2017-19E earnings by 1.4-1.7% to account for the revisions. Reiterate BUY, PT revised to RM21.70 from RM21.40.

9M17 Core PBT Rose 11% YoY; Accounting Estimates of UPR Revised

LPI Capital’s 9M17 core net profit and core PBT increased by 10.5% and 11% YoY driven by a 12% increase in net earned premium. Nonetheless, based on headline numbers, LPI’s 9M17 pre-tax profit and net profit were both down by 29% YoY and 35% YoY, in the absence of a RM150.4m realized investment gain in 9M16. In 3Q17, LPI revised its accounting estimates on its Unearned Premium Reserves (UPR) calculation prospectively for certain classes of business (to reflect a more accurate position of its UPR). As a result, 9M17 PBT saw a RM23.3m increase due to upward adjustments made to the overall net earned premiums, net commission expense and the net claims incurred. Excluding the financial impact of the revised accounting estimates of the UPR, we reckon that the annualized 9M17 net profit was approximately 8.7% below our 2017 net earnings forecast of RM303m (prior to revisions) and consensus.

Key Earnings Driver Is the Fire Segment (44% of Net Earned Premium)

The fire segment remains the key driver, contributing 44% to net earned premium (NEP), while registering a growth of 15.1% YoY respectively. Its motor and marine, aviation & transit (MAT) segments meanwhile remained lacklustre due to declining vehicle sales at its main motor sourcing partner and the overall weaker oil and gas activities. 9M17 net claims ratio had been relatively unchanged at 40% vs. 40.5% in 9M16. Overall 9M17 gross written premium (GWP) and NEP were up 12.6% and 11.9% YoY.

Reiterate BUY With a Revised Price Target of RM21.70

Given the change in accounting estimates, we have revised up our 2017- 19E net profit marginally by 1.4%/1.7%/1.6%, given a +5% adjustment made to the gross written premium and 5-10% on claims incurred and commission expense. We continue to like LPI for its steady premium growth, disciplined underwriting and superior margins. We reiterate our BUY recommendation with a revised price target of RM21.70 (based on a 3.3x 2018E P/BV target) from RM21.40 (at 3.27x 2018E P/BV).

Source: Affin Hwang Research - 09 Oct 2017