Period  4Q14/FY14

Actual vs. Expectations  FY14 net profit of RM283.0m ran ahead of expectations, accounting for 126/127% of our full-year forecast (RM22.4m)/street estimate (RM222m). The higher-thananticipated earnings were lifted by gains on the sale of PBBANK shares. Without the gain, FY14 net profit of RM223m would have met our expectation at 100% of our forecast. ` Dividends  A second interim single tier dividend of RM0.55/share was declared, bringing LPI’s full-year pay-out to 58.4% (or 74% excluding the gain).

 The Group has also proposed a bonus issue of 110,661,990 new ordinary shares on the basis of 1 bonus share for every 2 existing LPI share. The bonus issue is expected to be completed by end-1Q15. If approved, LPI’s FY15 share base could enlarge to 331m shares (from 221m shares). Consequently, our FY15 EPS forecast will be a lower RM0.70. This could see an adjustment downwards in our TP to c.RM12.65.

Key Results Highlights  YoY, cumulative net profit jumped 40.5% mainly on RM59.9m gain on the sale of PBBANK shares. Sansgain, net profit growth would be a more moderate 10.8%.

 Coupled with the advancement in net earned premiums to RM654m (albeit at a more moderate +5.3% [-1ppt]), total income grew 13.1% to RM885m.

 Meanwhile, growth at the net profit level accelerated on (i) slower growth in net claims incurred (+1.8%) as claims incurred ratio dropped 1.5ppts to 44%, and (ii) a decline in commission expense (-0.3%) with management expense ratio inching downwards by 50bps to 5.8%.

 The fire segment (+14%) continued to be the main driver of growth in net earned premiums. However, the other insurance segments such as marine, aviation and transit (-0.01%), and motor (-0.01%) came in flat.

 The retention ratio recorded in FY14 was marginally better at 59.5% (+55bps).

 QoQ performance painted a similar picture with 4Q14 net profit ballooning to 123.4%, as the gains from the sale of PBBANK shares was realised during the quarter (otherwise, growth would have registered at 9.1%).

 Net earned premium was also up (+4.4%), driven by the fire segment (+11%) and by the motor segment (+6%). As a result, total income inclined 33.2% to RM274m.

 Growth was further bolstered at the net profit level on a smaller growth in the combined ratio to 68.1% (+1.4ppt), helped by a decline in both the claims incurred ratio to 41.8% (-83bps) and management expense ratio to 6.5% (-30bps).

 All-in, the Group had produced a resilient set of results. However, tougher times lie ahead.

Outlook  Strategy-wise, we believe that the Group will maintain its focus on building its agency network while continuing to leverage on its bancassurance partnership with PBBANK to expand its insurance business apart from growing its broking and global partnership business.  It is likely that the consumer or household segments such as fire and motor insurance will still be the key growth drivers going forward. Nevertheless, growth in net earned premiums could be at the slightly lower mid-to-high single digit level amidst a more moderate economic growth in FY15. Our house is expecting a lower GDP growth in FY15 of 5.1% (vs. estimated FY14 GDP growth of 5.8%).

 Considering the high FY14 base following the PBBANK shares sale and resultant lower investment income moving forward, profitability could also register a decline in FY15.

Change to Forecasts  We adjust downwards our FY15 earnings estimate (-7.5%), after imputing a slower growth in premiums underwritten, and lower investment income from the Group’s reduced stake in PBBANK.

Rating Downgrade to MARKET PERFORM Valuation

 In line with the reduced FY15 EPS of RM1.05, we lower our cum-bonus Target Price (TP) to RM19.00 (from RM19.10).  We arrive at our TP based on a blended target FY15 PER of 18.2x (reduced from 18.5x) and FY15 PBV of 2.4x (reduced from 2.5x), having considered LPI’s 3- year historical PER (which hovered around 19x), and PBV (of between 2.3-2.7x).  We turn neutral on LPI given that recent economic developments may not be supportive of strong premiums growth in the consumer segments which are the drivers of LPI’s main growth drivers. Furthermore, at our TP of RM19.00, potential upside appears to be limited (<10%).

Risks to Our Call  Lower premium underwritten, hence growth.

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

Source: Kenanga