1H16 CNP came in within expectations. As expected, a first interim single tier dividend of 25.0 sen was declared. No changes to our earnings estimate. We maintain our cautious stance in light of the challenging industry outlook as well as the potential margin compression amid gradual liberalisation. Maintain UNDERPERFORM with an unchanged TP of RM14.65.

Within expectations. Netting off the PBBANK share sales gain of RM150.4m, the group reported 2Q16 core net profit (NP) of RM62.3m (-5% QoQ; +34% YoY), bringing 1H16 core NP to RM127.6m (+23%) which made up 48%/46% of our/consensus’ fullyear estimate, respectively. As expected, a first interim single tier dividend of 25.0 sen was declared for the quarter reviewed.

YoY, 1H16 revenue increased by 11%, driven by the higher gross earned premium seen in the Fire (+13%) as well as Motor (+13%) Insurance segments. Meanwhile, other income surged by 91%, mainly boosted by the PBBANK share sale gain coupled with decent growth seen in commission income (+12%). Core EBIT (ex-PBBANK share sales gain) improved by a wider quantum at 23%, underpinned by lower claims incurred ratio of 41.3% (-4.8ppts) despite the slight uptick in commission expense ratio of 19.4% (+0.2ppts) and higher management expense ratio (+0.5ppts). As a result, the combined ratio dropped to 68.1% (-4.2ppts). Meanwhile, core annualised ROE improved to by 330bps to 14.8%.

On QoQ basis, while 2Q16 revenue registered a healthy growth of 6% on the back of higher gross earned premium (+12%) as well as healthy key ratios (claims incurred ratio of 39.9% (-3.2ppts), lower combined ratio (-1.5ppts)), core EBIT marginally only inched up by 1%, dragged down by lower commission income (-26%) due lower premium ceded to reinsurers. Aggravated by higher effective tax rate of 24% (vis-à-vis 1Q16 ETR of 20%), core NP dropped by 5%.

Headwinds still plague industry. The challenging economy is expected to dampen the growth of the 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 road map for a 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.

Maintain UNDERPERFORM rating with an unchanged TP of RM14.65. We made no changes to our FY16E and FY17E earnings. Hence, our TP remains at RM14.65. This is based on a blended FY17E PER/PBV ratio of 17.0x/2.5x (both based on LPI’s average 5- year PER and PBV.

Risks to our call: (i) Higher premium underwritten, hence growth, (ii) Lower-than-expected combined ratio.

Source: Kenanga Research - 12 Jul 2016