Period      1Q13/3MFY13

Actual vs. Expectations    The 1Q13 PAT of RM42.1m was below ours (18%) but within the consensus expectations (22%).

Dividends     No dividend was declared during the quarter.

Key Result Highlights    On a QoQ basis, the group’s 1QFY13 PAT was weak at RM42.1m (-11% QoQ). This was mainly due to the lower net earned premium as well as higher claims incurred in the quarter.

LPI registered a 6.0% YoY growth rate in its gross written premium to RM315.5m. However, the group saw a negative growth rate of -1.4% YoY on the net premium line to RM134.8m. The fire division was the main drag as its net written premium of RM40.5m decreased by 9.7% YoY. We believe that this was due to a stringent risk selection and claim management policy employed with the aim of further improving its underwriting result.

In addition to that, the total portfolio claims ratio was higher at 53.6% as compared to 4Q12’s 40.3% and our full-year forecast of 48%. The fire division’s loss ratio rose to 25.4% (vs. 4Q12: 10.1%), the motor division to 77.9% (vs. 4Q12: 73.0%), and the miscellaneous division to 52.0% (vs. 4Q12: 40.3%). However, the marine, aviation & transit division ratio rose to 18.1% (vs. 4Q12: 45.3%).

A relatively low expense ratio was seen in 1Q13 at 12%, which was encouraging and was also within the management guidance and our forecast of 12%.

Outlook      LPI delivered a higher than industry growth in 2012. Its gross premium portfolio rose beyond RM1.0b and together with the lag between the higher premium growth and profit, we believe its earnings have more room to grow in 2013 despite a weaker set of 1Q13 results.

Its business cash generation remains the strongest in the sector. This should continue to support a high dividend payout. We are estimating a dividend payout ratio of 90% for FY13-FY14 in our model. Based on our estimates, LPI could potentially pay out RM0.79-RM1.21 as dividends for FY13-FY14, translating into net dividend yields of 6.7%- 7.7%.

Change to Forecasts    Our net profit forecasts are largely unchanged as management guided that there is a time lag of 12 months to recognise profits and hence, we continue to see a strong earnings momentum throughout the remainder of FY13.

Rating    MAINTAIN OUTPERFORM

Our OUTPERFORM rating is maintained as the current share price implies a 16% total upside to our target price.

Valuation     Maintaining our TP at RM16.10 based on 15.0x FY13 PER, which also translates to 2.26x BV and a 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