LPI Capital’s 1H18 net profit of RM140m (flat yoy) was below our expectations due to higher claims incurred and weaker margins against our projection. Industry challenges continue to persist in 2Q18 due to price competition in the fire insurance and motor segments, amidst a more liberalized market. LPI continued to build its market share at the expense of lower margin, as reflected by a net earned premium growth of 12.7% in 1H18, supported by growth in fire (1H18: +11% yoy) and motor (1H18: +10% yoy). Reiterate BUY, price target raised to RM18.90 as we shift our valuation horizon to 2019.

1H18 Net Profit Flat Yoy Due to Higher Claims and Weaker Margins

LPI Capital’s 1H18 net profit of RM140m was flat yoy (largely due to higher claims and weaker margins) while 2Q18 net profit of RM65.7m was down by 11.2% qoq and 3.4% yoy. The weaker results in 2Q18 against 1Q18 was attributable to lower investment gains and higher taxation, though underwriting profit improved by 15.6% qoq arising from lower claims. During the period under review, we saw stronger fire and motor net earned premium, of which rose by 6.6% qoq (+3.1% yoy) and 4.9% qoq (+12.1% yoy). Overall 1H18 net earned premium remained robust, rising by 12.7% yoy but underwriting profit was flat yoy as margin (1H18: 29%; 1H17: 32.6%) was mitigated by higher claims and impairments (1H18 net claims ratio at 44% vs. 39.8% in 1H17).

Key Earnings Driver From the Fire Segment

The fire segment remains the key driver, contributing 43% to 1H18’s net earned premium (NEP), followed by the motor segment 30.9% and marine, aviation & transit (MAT) at 2.2. In terms of underwriting surplus, fire contributes close to 70% to the group while motor at 8.8%.

Reiterate BUY, Price Target Raised to RM18.90 (from RM18.33)

We Reiterate Our BUY Recommendation and Raise Our Price Target to RM18.90 (from RM18.33), based on a 3.2x 2019E P/BV target. We continue to like LPI for being the market leader in the general insurance segment with approximately an 8.0% market share while continue seeing steady premium growth amidst a more competitive market (under the 2nd phase of industry detarrification), disciplined underwriting and superior margins.

Key Risks

Key downside risks include: i) Weaker-than-expected gross written premium growth; ii) Price war triggered by industry detariffication; iii) Significant decline in the value of LPI’s stake in Public Bank.

Source: Affin Hwang Research - 10 Jul 2018