• LPI’s 3Q20 net profit of RM86.2m (-1.9% yoy; +11.3% qoq) beat our and consensus estimates while 9M20 net profit (+2.4% yoy) accounted for circa 87-88% of our and market expectations.
• For 9M20, LPI continued to surprise us with an 8.6% yoy growth in underwriting profit. This was contrary to our expectations of rising claims (as the business outlook remains uncertain) which may continue to erode the bottom line.
• Upgrade to BUY (from Hold) on valuation grounds and an attractive dividend yield of 4.7-5.5%. PT raised to RM15.90, based on a P/BV target multiple of 3.1x on 2021E BVPS.

LPI Reported a Stronger Qoq Net Profit, 9M20 Net Profit Rose 2.4% Yoy

LPI Capital saw 3Q20 net profit recover by 11.3% qoq to RM86.2m (though yoy was down 1.9%), as the quarter was driven by lower net claims incurred and management expenses. As a result, 3Q20 saw improved underwriting profit (+14% yoy; +20.7% qoq) despite seeing a flat top line at the net earned premium (NEP) line. The negative impact of the MCO eased, as we saw a recovery in 3Q20 gross written premium (GWP), which was up 11.7% qoq. Nonetheless, for 9M20, GWP and NEP were flat yoy as a result of a weaker 2Q. Meanwhile, 9M20 underwriting profit expanded by 8.6% yoy, as net earned premium continued to hold up yoy (given less premium ceded out), while commission expenses (-14.4% yoy) and net claims incurred declined (-3.8% yoy). On a more positive note, 9M20 net claims ratio appeared to have edged lower to 43.7% vs. 45.2% in 9M19.

4Q20 Earnings May Hold Up, Barring Further Economic Deterioration

In our view, even with the implementation of the ‘Conditional Movement Control Order’ (CMCO), most business sectors in the economy remain business-as-usual. Hence, we do not think that 4Q20 will be any worse vis-à-vis 3Q20. We are lifting our GWP forecasts by 10-14% and NEP by 20-23% for 2020E/21E/22E while forecasting net claims ratios of 45-47% and combined ratios of 69% for 2020E-2022E.

Upgrade to BUY (fom Hold), Price Target Raised to RM15.90

We upgrade LPI from Hold to BUY, on valuation grounds as our revised TP of RM15.90

(based on a target P/BV multiple of 3.1x on 2021E BVPS of RM5.05) presents an upside potential of 24%, coupled with attractive dividend yields of 4.7-5.5%. Our 2020E/21E/22E assumptions: i) GWP growth at 3% yoy; and ii) NEP growth at 5.3%/4.4%/3.6% yoy. LPI’s robust capital adequacy ratio (CAR) in excess of 400% reflects its strong underwriting capacity to take on more risks and withstand potential shocks. Downside risks: sharp deterioration in the economy given the 2nd wave COVID-19 pandemic.

Source: Affin Hwang Research - 18 Oct 2020