Period

1Q15/3M15

Actual vs. Expectations

1Q15 net profit of RM57.2m met expectations, accounting for approximately 25% of both our full-year forecast and street estimate. `

Dividends

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

Key Results Highlights

YoY, 1Q15 net profit grew 13.1% due in part to decent growth recorded in net earned premiums (NEP) to RM143.9m (+5.9%) and the advancement of investment income to RM29.2m (+11.5%). As a result, total income gained 6.1% to RM203.9m.

Growth at the net profit level accelerated on: (i) a lower claims incurred ratio (-1.7ppts), and (ii) a decline in the commission expense ratio (-1.3ppts). Consequently, the combined ratio dropped 5.1ppts to 72.0%.

The segment which continued registering growth in underwriting surplus this quarter was the fire segment (+30%), whereas the motor (-17%) and marine, aviation and transit (-4%) segments recorded declines.

QoQ, 1Q15 net profit fell 51.1% on a retracement of NEP (- 18.6%) and the high base effect last quarter arising from capital gain from the sale of PBBANK shares, causing total income to come in 25.6% lower.

The decline was exacerbated at the net profit level by an increase in the claims incurred ratio (+7.3ppts), commission expense ratio (+2.0ppts) and management expense ratio (+4.1ppts), pushing the combined ratio upwards by 3.9ppts.

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 slightly lower high single digit level amidst a more moderate economic growth in FY15 in light of the implementation of the Goods and Services tax on 1 Apr, lower oil prices and lacklustre property market. Our house is expecting a lower GDP growth in FY15 of 5.1% (vs. FY14 GDP growth of 6.0%).

Considering the high FY14 base following the PBBANK shares sale and resultant lower investment income moving forward, net profit could also come in lower in FY15.

Change to Forecasts

No changes in our earnings estimate.

Rating

Downgrade to UNDERPERFORM

Valuation

Following the completion of the 1-for-2 bonus issue involving the issuance of 110,661,990 new ordinary shares on 25 Mar 2015, LPI’s share base is now a larger 331m shares (from 221m shares). Hence, our previous cumbonus TP of RM19.00 should be adjusted to RM12.67 (on ex-bonus basis).

However, given the greater liquidity post bonus, we are pegging the highest 10-year blended PE/PB ratio which was achieved back in FY10 of 2.5/21.2x (from 2.4x/18.2x previously). At the same time, as we have also rolled over our valuation base year to FY16, our TP is revised up to RM14.43. Despite this, LPI’s share price performance has rallied in recent months, leaving only 1% upside potential. Hence our UNDERPERFORM rating as per our rating definition.

Risks to Our Call

Lower premium underwritten, hence growth.

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

Source: Kenanga Research - 9 Apr 2015