Journey to Wealth
LPI Capital - Refutes M&A speculations
News According to media reports, the market is speculating that LPI is the midst of crafting a merger and acquisition deal with rival Allianz Malaysia Berhad.
However, in a reply to these reports, the group's CEO, Mr. Tee Choon Yeow, has denied the speculations. The company is focusing on organic expansion, for the moment, as there is still room for growth. As such, he said that speculations on M&As involving LPI is unfounded.
Comments Judging from our knowledge and analysis of the management's plans over the last two years, the group has always been looking for an organic expansion, e.g. to acquire good agents in the industry instead of acquiring a rival company. This strategy has proven successful to the company with its total gross premium size likely to reach above RM1.0b by end of 2012 from 2010's RM750m.
The group is also expanding on its partnership tie-up with foreign general insurers in growing its untapped businesses, especially for the marine segment, which has a low claim ratio of 20%.
As such, we believe that the group is well positioned to enjoy higher earnings from FY13 onwards. Hence, we share the belief that LPI does not need to grow via M&A at this junctures.
Outlook We believe LPI's higher-than-industry organic growth rate is sustainable. Its gross premium portfolio is likely to reach beyond RM1.0b and together with the lag between the higher premium growth and the profits, we believe its earnings have more rooms to grow in 2013.
Its business cash generation remains the strongest in the sector. This should continue to support a high payout. We estimate a dividend payout ratio of 90% for FY12-FY14 in our model. Based on our estimates, LPI could potentially pay out RM0.79-RM1.21 as dividends for FY12-FY14, translating into net dividend yields of 5%-7%.
Forecast Our FY12-13 net profit forecasts are unchanged as management said that there is a time lag of 12 months to recognise the profits, and hence our FY13 PAT is likely achievable.
Rating MAINTAIN OUTPERFORM
Our OUTPERFORM rating is maintained as the current share price implies a 24% total upside to our target price.
Valuation Our TP is unchanged at RM16.10 based on a 15x PER, 2.26x BV and 6.7% net yield.
Risks There could be a risk of a lower dividend payout as the group may need to conserve capital in 2013-14 if it intends to achieve a higher premium growth than what we are expecting now.
Source: Kenanga
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