News

Last Thursday, LPI announced the disposal of 1,113,900 PBBANK shares (0.03% of PBBANK issued shares ex. treasury shares) leaving its PBBANK shareholding at 1.45%.

Comments

This represents the second sale of PBBANK shares (first being in 4Q14).

According to the announcement, FY15 EPS will be higher by 5.0 sen from the approximate RM15.3m gain. The gain, however, is non-recurring and would not impact core FY15 EPS and DPS. Nevertheless, there will be a loss in dividend income, est. to be c.RM650k-RM670k pa in FY15/16.

Notwithstanding this, FD interest could potentially be higher at RM720-750k (assuming 12 months rate of 3.3%). Thus, non-interest income may, in fact, see a potential slight RM70k-RM80k increment.

Outlook

The move appears rational on the back of the less exciting prospects of the banking sector (expected net profit growth of 7.2/4.3% in FY15/16 for banks under our coverage) and good FD rates (Mar 2015: 3.3% for 12mths vs. FY14: 3.2% for 12mths) which should be sustained given the intense competition amongst banks and the higher OPR.

Furthermore, the move to up its coffers also signals potential expansion in the horizon which could increase earnings prospects moving forward.

Having said that, FY15 net profit could still come in lower considering the high FY14 base following the larger sale of PBBANK shares in 4Q14 which provided a higher gain of RM59.9m.

Core FY15/16 net profits, on the other hand, will likely to continue registering growth. Our forecasts assume growth of 4.5-5% in FY15/16.

However, for the avoidance of doubt, FY15 EPS and core EPS will likely still register a decline given the larger shares base post RI completed on 15 Mar 2015.

Change to Forecasts

No change in our core earnings estimates as any potential incremental income is expected to be minimal.

Rating

Upgrade to MARKET PERFORM

As market valuations have approached our target, we turn neutral on LPI, upping our rec. to MARKET PERFORM.

We like LPI for its proactive management and the stronger prospects of its continued expansion.

Having said that, the possibility of tougher times ahead still lingers once the detariffication of fire (FY13 GWP: 36.4%) and motor (FY13 GWP: 23.6%) insurance takes place (which could come as early as next year).

Valuation

Target price unchanged at RM14.44 based on blended FY16E price-book (PB)/price-earnings (PE) ratio of 2.5/21.2x.

The PB/PE ratio applied represents the highest 5-year blended PB/PE ratio which was achieved back in FY10 which we believe is justified given the greater liquidity post 1-for-2 bonus issue which enlarged LPI’s share base to 332m shares (from 221m shares).

Risks

Lower premium underwritten, hence growth.

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

Source: Kenanga Research - 5 May 2015