• LPI’s 2Q20 net profit of RM77.4m (+4.7% yoy; -0.7% qoq) was within our expectations. 1H20 results accounted for 56% of our 2020 estimate. An interim DPS of 28 sen was proposed (2Q19: 27 sen).
• For 1H20, LPI saw underwriting profit up 5.5% yoy, as net earned premium continued to hold up yoy while commission expenses declined. Nonetheless, we expect weaker profits in 2H20, with expectations of rising net claims.
• Maintain HOLD on LPI, with an unchanged PT of RM15.00, based on a P/BV target multiple of 3.0x on 2021E BVPS. Our earnings forecasts are unchanged.

LPI’s 2Q20 net profit held up qoq, 1H20 net profit up marginally

LPI Capital reported a 2Q20 net profit of RM77.4m (+4.7 yoy; -0.7% qoq), as the quarter was underpinned by better investment income (+27% yoy) while net claims rose by a marginal 1.2% yoy and 4.5% qoq (due to ‘low claims’ months in April and May, but normalized in June). The impact of the MCO was reflected at LPI’s top line, as we note that 2Q20 gross written premium (GWP) was down 7% yoy and 30% qoq. The impact however was mitigated by lower provision for technical reserves (for unearned premium reserves) in 2Q20, which resulted in higher net earned premium of +6% qoq and flat yoy. Underwriting profit for 2Q20 rose 4.5% qoq while for 1H20, was up 5.5% yoy driven by lower commission expenses while net claims incurred was flat. 1H20 net profit meanwhile was up by a marginal 2.8% yoy.

A weaker 2H20, to be driven by higher claims and lower investment gains

We are of the view that LPI may continue to face challenges in 2H20, as net claims incurred is expected to continue rising, driven by the motor and miscellaneous (primarily employee health benefits) segments as the economy reopens post-MCO (from June onwards). Meanwhile, with lower market volatility in 2H20, we expect less investment fair-value gains to prop up its bottom-line profits.

Maintain HOLD, Price Target unchaged at RM15.00

We maintain our HOLD rating on LPI, with a 12-month TP of RM15.00 based on a target P/BV multiple of 3.0x on 2021E BVPS of RM4.98. We maintain our 2020-22E earnings based on these assumptions: i) GWP growth at -7.0% for 2020E and flat for 2021E; and ii) net claims ratio at 44%. We foresee 2020 net profit to decline by 16% yoy and rebound 12.4% yoy in 2021E. LPI’s robust capital adequacy ratio (CAR) in excess of 400% reflects its strong underwriting capacity to take on more risks and withsthand potential shocks. Upside/downside risks: stronger/weaker GDP; lower/higher claims ratio.

Source: Affin Hwang Research - 18 Aug 2020