Period

2Q15/1H15

Actual vs. Expectations

2Q15 reported net profit (NP) came in at RM85.7m, bolstered by a series of PBBANK share sales, bringing 1H15 NP to RM142.9m.

Consequently, LPI’s shareholding in PBBANK slightly reduced to 1.42% at end-2Q15 (from 1.48% at end-1Q15).

On a core basis, ex-PBBANK share sale gain of RM33.35m, NP would have registered at RM52.4m and 1H15 NP at RM109.6m, meeting expectations at 47% of both our full-year forecast and street estimate.

Dividends

First interim single-tier dividend of 20.0 sen was declared, which will go ex on 22 Jul and payment will be on 3 Aug.

Key Results Highlights

YoY, 1H15 NP surged 40.5% mainly due to hefty capital gains (+>100%) lifted by a series of PBBANK share sales this quarter.

Excluding the gain, core NP would have grown 7.7%, which is still commendable but more moderate compared to its historical track record of double digit growth. Core NP growth was supported by advancements in net earned premiums (NEP) (+3.8% to RM320.9m) and other income (core) (15.8% to RM102.1m); aided also by a 1.2ppts reduction in the effective tax rate (ETR) (core) to 21.3%.

Potential NP expansion was capped by larger claims (ratio: +0.6ppts) and a higher management expenses ratio (ratio: +2.6ppts). Consequently, the combined ratio increased to 72.3% (+1.1ppts).

Segment-wise, surplus widened for fire (+16.2%), marine, aviation and transit (+19.4%) and misc. (+1.1%) underwriting. Surplus in the motor segment, on the other hand, contracted (-29.4%) as its claims ratio increased 6.1ppts to 80.2% negating growth in its NEP (+7.6%).

QoQ, 2Q15 NP similarly ballooned by 49.9%, given the realised gains.

On exclusion, core NP would have instead declined 8.4%, notwithstanding a higher NEP (+23.1% to RM177.0m), as other income (core) retreated (-29.8% to RM42.1m).

On the upside, reductions were recorded in claims (-5.5ppts) and management expense ratio (-0.8ppts). However, given that net commission expense was seen this quarter (as opposed to a net commission income in the preceding quarter), the combined ratio still inched up 54bpts to 72.5%. ETR (core) was also higher by 4.3ppts.

Outlook

In terms of strategy, the Group is expected to maintain 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.

Hence, it is likely that fire insurance will still be the key growth driver going forward. However, growth in NEP should continue to hover at the 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%).

Change to Forecasts

No changes have been made to our earnings estimates.

Rating

Maintain MARKET PERFORM

While LPI is still proving resilient, with core NP growth still registering in the high single-digit for this 1H15 amidst a challenging economic environment, growth has somewhat moderated from its historical double-digit growth and claims are creeping up. Hence, we remain NEUTRAL.

Valuation

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

The price multiples applied represent the highest 10-year blended PB/PE ratio, which was achieved back in FY10 given the greater liquidity post bonus issue of 110,661,990 new ordinary shares on 25 Mar 2015. LPI’s share base is now a larger 331m shares (from 221m shares).

Risks to Our Call

Lower premium underwritten, hence growth.

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

Source: Kenanga Research - 9 Jul 2015