News

In a Bursa announcement last week, LPI announced the disposal of 5.0m PBBANK shares, the first for this year (representing 0.13% of PBBANK issued shares excluding treasury shares).

Post disposal, LPI’s shareholding in PBBANK stands at 1.22% (or 47.2m shares ex. treasury shares).

Comments

This represents the sixth sale of PBBANK shares (first one being in 4Q14). According to the announcement, this disposal will result in a gain of c.RM77.5m to FY16 NP or FY16 EPS of 23.34 sen. Nonetheless, we deemed the gain as a non-core item and hence, will not impact the FY16E core NP or core EPS.

The announcement also stated that the rationale for the disposal is to realise tax-exempt capital gains, to improve the group’s Capital Adequacy Ratio and to support business growth. The sale proceeds will be placed into fixed deposit or invested in bonds to generate interest income.

Outlook

We are not surprised by the move and view that the disposal is rational, especially amid the less exciting prospects of the insurance sector where the challenging economy will dampen the growth of insurance industry in 2016.

Meanwhile, industry growth is expected to grow modestly at 2.5%-3.5% for 2016 as forecasted by the General Insurance Association of Malaysia (PIAM).

Furthermore, with the gradual liberalisation (which recently witnessed with the introduction of a road map for phased liberalisation of motor and fire tariffs), stiffer competition is likely to be seen with more new products (more competitive rates) to be offered by insurers. We believe this could lead to further margin compression to the insurers.

As LPI had consistently strove to boost earnings by capital gains, we do not discount further disposal of PBBANK shares to enhance its dividends for FY16.

Change to Forecasts

While the disposal gain will boost our FY16E NP/EPS by 23%, we made no change in our FY16E core NP as any potential incremental income from the disposal is expected to be minimal.

Rating

Maintain UNDERPERFORM

Valuation

Post announcement, our TP has been raised from RM14.20 to RM14.43 after factoring in the disposal gains of 23.34 sen.

This is still based on an unchanged blended FY16E PER / PBV ratio of 17.0x/2.5x (both based on LPI’s average 5-year PE and PB), with an addition of 23.34sens gains/share on top of RM14.20.

Risks to Our Call

Higher premium underwritten, hence growth.

Lower-than-expected combined ratio.

Source: Kenanga Research - 25 Apr 2016