Period  2Q14/1H14

Actual vs. Expectations The reported 1H14 net profit of RM101.8m (+14.8% YoY) is approximately within consensus estimate of RM225.0 and that of ours of RM224.0m. While the reported net profit only accounted for approximately 45% of these forecasts, we are not overly concerned as 1H had always been weaker as opposed to 2H.

Dividends  Largely inline, as it declared a first interim single tier dividend of 20.0 sen/share vs. 18.0 sen the previous corresponding year.

 Ex-date and entitlement dates are set on 11 and 13 August 2014 while payment date is fixed on 21 August.

Key Results Highlights1H14 vs. 1H13

 YoY, the Group’s revenue gained 5.3% to RM569.3m compared to RM540.9m in 1H13. The increase in revenue was mainly attributed to higher gross premium earned (+5.4%). This reflects the strong general steady growth in its general insurance business.

 The growth in gross earned insurance was driven by: (i)11.3% growth in Fire Insurance and (ii) 5.4% growth in Marine, Aviation & Transit sector. These two segments accounted for 35.7% and 9.6% of total gross earned premium, respectively. As for motor and other miscellaneous insurance activities, their growth rates were relatively low at 2.4% and 1.5%, accounting for

24.2% and 30.6% of total gross earned premium, respectively.

 The growth of net earned premium was inline with gross earned premium with a YoY growth of 5.4% due to the similar retention ratio of 57.9% as opposed to 1H13.

 Nonetheless, the Group was still able to register much stronger bottom-lines growth. PBT and net profit grew 15.5% and 14.7%, respectively.

 The better bottom-line performance was attributed to lower claims incurred ratio of 45.5% (to net earned premium) vis-à-vis the ratio of 48.2% in 1H13 owing to better net claims incurred ratio for Fire Insurance (1H14: 15.9% vs. 1H13: 22.4%).

 Besides, the well-controlled commission expenses (+2%) and higher commission income (+6.9%) also contributed to better profitability.

2Q14 vs. 1Q14

 QoQ, revenue of the Group improved 4.9% from RM277.8m in 1Q14. The major contributing factors were the much stronger gross earned premium of 12.1%.

 Net earned premium grew at a faster rate at 27.5% QoQ due to higher retention ratio of 61.4% vs. 54.0% in 1Q14. As a result, underlying surplus from insurance business grew >100% QoQ in 2Q14. Recall that the profitability of LPI was attributed to investment income in 1Q14, mainly due to dividend received from PBBANK.

 Nonetheless, the net profit merely grew 1.2% QoQ no thanks to higher effective tax rate of 25.3% vs. 19.3% in 1Q14.

Outlook  Our view remains unchanged. We believe the Group will focus on building its agency network and continue to leverage on their partnership with PBBANK by using banassurance to expand their insurance business apart from growing its broking and global partnership business.

 We also believe its profitability will grow at a mid-teen growth rate, which is inline with growth in net earned premium.

Consumer or household segments such as fire and motor insurance will still be the key growth drivers going forward.

Change to Forecasts No change in our earnings estimates. We maintain our FY14 and FY15 net earnings estimates of RM224.0m and RM251.5m, respectively.

Rating Maintain OUTPERFORM with a higher Target Price (TP) of RM19.10 (vs. RM18.75 previously). Coupled with the potential dividend yield of 4.6%, the stock offers c.13% in Total Return.

Valuation  We raise our TP to RM19.10 as we have rolled over our valuation base year to FY15.

 Our TP represents a blended target FY15 PER of 18.5x and FY15 PBV of 2.5x.

 We believe such valuation is not excessive as the stock has been trading at ~19x PER for the last 3 years. Besides, the PBV has also been oscillating between 2.3x to 2.7x in the last three years.

Risks to Our Call  Lower premium underwritten, hence growth.

 Higher-than-expected combined ratio as well as effective tax rate.

Source: Kenanga