LPI Capital Bhd (LPI) announced its second disposal of 4.7m PBBANK shares for the year hot on the heels of its recent disposal of 5.0m shares. This will result in a net gain of RM72.9m (or +22%) to its FY16E NP or an EPS accretion of 21.95 sen. Rationale of this 7th disposal is to realise tax exempt capital gains to boost the group’s Capital Adequacy Ratio (CAR). Our conservative view on the group’s prospect remains unchanged premised on modest industry growth of 2.5%-3.5% forecasted by PIAM, and phased liberalisation of motor and fire tariffs, which could eventually lead to further margin compression to the insurers. While the disposal gain will boost our FY16E NP/EPS by 22%, we made no changes to our FY16E core NP as any potential incremental income from the disposal is expected to be minimal. Maintain UNDERPERFORM with a higher TP of RM14.65 from RM14.43 after factoring in the disposal gain of 21.95 sen. Meanwhile, base valuation 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).

Second PBBANK share disposal of the year to improve its CAR. In a Bursa announcement, LPI announced the disposal of 4.7m PBBANK shares, the second tranche for this year (representing 0.12% of PBBANK issued shares excluding treasury shares). Post disposal, LPI’s shareholding in PBBANK stands at 1.1% (or 42.5m shares excluding treasury shares). This represents the seventh sale of PBBANK shares (first one being in 4Q14). According to the announcement, this disposal will result in a net gain of c.RM72.9m to FY16E NP or EPS of 21.95 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 (current level is already >200% and above the threshold of 130% required by BNM) and to support business growth. The sale proceeds will be placed into fixed deposit or invested in bonds to generate interest income.

Headwinds still plague industry. We were not surprised by the move and view that the disposal is rational, especially amid the less exciting prospect 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 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 occasionally strove to boost earnings through capital gains, we do not discount further disposal of PBBANK shares to enhance its dividends for FY16.

Still an UNDERPERFORM. While the disposal gain will boost our FY16E NP/EPS by 22%, we made no changes to our FY16E core NP as any potential incremental income from the disposal is expected to be minimal. Our TP has been raised from RM14.43 to RM14.65 after factoring in the disposal gains of 21.95 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 21.95 sen/share on top of RM14.43. Risks to our call are: (i) Higher premium underwritten, hence growth, (ii) Lower-thanexpected combined ratio. 

Source: Kenanga Research - 11 May 2016