LPI Capital saw a favourable quarter in 3Q18, with net profit coming in at RM91.8m (+40% qoq; flat yoy). Drivers in 3Q18 were mainly stronger net earned premium growth, lower net claims incurred and higher overall investment income against 2Q18. In our view, the 9M18 net profit of RM230m (-0.3% yoy) is within our expectation, accounting for 71% of our FY18E net profit estimate of RM322.2m. We expect 4Q18 to perhaps repeat the performance of 3Q18, on the back of management’s move to exercise more caution in motor risk-underwriting as well as continue to focus on the roll-out of more comprehensive fire insurance products, amidst a more liberalized market. Reiterate BUY, price target unchanged at RM18.90 based on a 3.2x P/BV target on 2019E BVPS.

Flat Yoy 9M18 Net Profit; Strong Rebound in 3Q18 Results

LPI Capital staged a rebound in 3Q18 net profit, rising by almost 40% qoq though on a yoy was flat. Meanwhile, 9M18 net profit of RM230m was marginally lower yoy, largely due to higher claims and weaker margins. Overall, results were within our expectations, accounting for 71% of our FY18E estimate of RM322.2m. In 3Q18, we saw stronger motor net earned premium growth, rising by 4.3% qoq (as a result of the strong auto sales during the tax holiday period of June-Aug 2018) while the miscellaneous segment was up 18.8% qoq. On the other hand, the fire and marine/aviation/transport (MAT) were down by 2.7% qoq and 5.9% qoq. On a more positive note, we saw an improving trend in the group net claims incurred ratio from 47.1% in 1Q18 to 41% in 2Q18 and 37.2%% in 3Q18 (with 9M18 averaging 41.6% vs. 40% in 9M17), largely underpinned by recovery in the motor segment.

Fire Policy-underwriting Still the Key Driver to Underwriting Profit

The fire segment contributed 42% of 9M18’s net earned premium (NEP), followed by the motor segment at 31% and MAT at 2.1%. Fire segment accounted for about 65% of 9M18 underwriting surplus.

Reiterate BUY, Price Target Maintained at RM18.90

We reiterate our BUY recommendation and maintain our price target at RM18.90, based on a 3.2x 2019E P/BV target. We maintain our FY18-20E earnings forecasts for LPI, which are underpinned by the following key assumptions: i) GWP growth at 2-5%; ii) net earned premium growth at 5- 5.6%; iii) net claims ratio at 38-39%. Downside risks: price competition, spike in claims, higher fraud cases and weaker premium growth.

Source: Affin Hwang Research - 11 Oct 2018