LPI Capital’s 4Q17 appeared lacklustre, as net profit shrank by 10% qoq due to lower investment gains though it was flat yoy. FY17’s core net profit of RM309.3m (+6.1% yoy, excluding a RM150m disposal gain on securities in 2016) was in-line with our and consensus estimates. The operating environment in 2017 has been challenging for LPI, but nonetheless, the group has maintained a healthy gross written premium growth of 11.2% yoy. A second interim dividend of 45 sen (4Q16: 55 sen) has been proposed and meanwhile, a bonus issue of 1-for-5 shares for shareholders was announced. Reiterate BUY with an unchanged RM22.00 price target.

FY17 Core PBT Rose 9.6% Yoy Under the Revised Accounting Estimates

LPI Capital saw its FY17 core net profit and core PBT rise by 6.1% and 9.6% yoy, in the absence of significant investment gains (a RM150.4m gain on securities disposal took place in FY16). To recap, in FY17, LPI had revised its accounting estimates, which resulted in a higher unearned premium reserves (UPR) calculation, which was reflected in the P&L statement as higher net earned premium by an amount totalling RM35.8m. Nonetheless, LPI’s FY17 headline pre-tax profit and net profit were down by 22.2% yoy and 28.2% yoy. Its underwriting profit continued to see healthy growth of 10.6% yoy for FY17 (on the back of a low combined ratio of 64% vs. 63.7% in FY16) while 4Q17 saw growth of 9.6% qoq and 2.4% yoy.

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

The fire segment remains the key driver, contributing 44.2% to FY17’s net earned premium (NEP), while registering a growth of 16.5% yoy. Its motor and marine, aviation & transit (MAT) segments remained lacklustre due to declining vehicle sales and a weaker oil and gas sector. The FY17 net claims ratio had been relatively unchanged at 38.5% vs. 38.3% in FY16 despite being adversely affected by additional gross claims of RM43.3m from the floods in Penang (in November 17). Overall, LPI’s FY17 gross written premium (GWP) and NEP grew by 11.2% and 10.8% yoy on expansion of its agency force and contributions from global partners.

Reiterate BUY, Price Target Unchanged at RM22.00

We continue to like LPI for its steady premium growth, disciplined underwriting and superior margins. We reiterate our BUY recommendation at our price target of RM22.00 (based on a 3.34x 2018E P/BV target).

Source: Affin Hwang Research - 11 Jan 2018