Period  3Q14/9M14

Actual vs. Expectations  3Q14 net profit of RM64.2m brought 9M14 net profit to RM166.0m. This is within expectations, accounting for 74.1% of our full-year forecast and 74.8% of street estimate, respectively.

Dividends  As expected, no dividend was declared since our last results note.

Key Results Highlights YoY, cumulative net profit grew 11.3% due to higher net earned premiums of RM476.9m (+5.7%).

 Gains were also recorded in investment income (+6.9%), realised gains (+ >100%), and commission income (+2.9%), while other operating income slipped (-8.1%). As a result, total income gained 5.9%.

 Growth at the net profit level accelerated on slower increases in: (i) net claims incurred (+1.6%), and (ii) commission expense (+0.9%).

 Meanwhile, factors which limited potential growth in 9M14 were: (i) faster growth of management fees (+8.1%) and (ii) a higher effective tax rate of 20.5% (+80bps).

 All ratios looked good with retention ratio holding steady, claims incurred ratio declining (-1.7ppts), and combined ratio improving (-1.9ppts).

 Of the insurance segments, fire (+15.2%) outshone the rest with an excellent double-digit growth. Growth was also reported in miscellaneous insurance (+4.9%). The performances of the other insurance segments, however, namely marine, aviation and transit (flat), and motor (-2.7%) were uninspiring.

 QoQ, 3Q14 net profit advanced 25.4% despite a decrease in net earned premiums to RM167.8m (-3.1%).

 Potential growth was further capped by the continued growth in net claims incurred (+1.6%), and the retracement in commission income (-9.1%).

 Nevertheless, strong growths recorded in investment income (+ >100%) on higher dividend received, and other operating income (+58.9%) brought total income back to the positive territory at RM213.2m (+3.9%).

 Coupled with a large decline in the effective tax rate to 17.1% (-8.3ppts), 3Q14 net profit was propelled to register an excellent sequential growth.

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 in-line 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 changes in our earnings estimates.

Rating Maintain OUTPERFORM

Valuation  …at an unchanged Target Price (TP) of RM19.10. This implies a total upside potential of 14.5%.

 We arrive at our TP based on a blended target FY15 PER of 18.5x and FY15 PBV of 2.5x, having considered LPI’s 3- year historical PER (which hovered around 19x), and PBV (of between 2.3-2.7x).
 

Source: Kenanga