9M16 CNP came in within house expectation. Absence of DPS was as expected. Post model updates, our FY16EFY17E NP estimates have been marginally tweaked up by 2-3% for house-keeping purposes. We recently reversed our previous conservative view on LPI following a meeting with management as we are feeling more reassured by the group’s strategies in sailing through industry headwinds. Maintain MARKET PERFORM with a higher TP of RM16.55.

Within house expectation. The group reported 3Q16 core net profit (NP) of RM77.8m (+25% QoQ; +3% YoY), bringing 9M16 core NP to RM205.4m (+14%) which made up 76%/61% of our/consensus’ fullyear estimates. Note that the 9M16 core NP has been adjusted by netting off the PBBANK share sales gain of RM149.6m. As expected, no dividend was declared under the quarter reviewed.

YoY, 9M16 revenue increased by 8% driven by the higher gross earned premium (+8%) seen in the general insurance segment. Delving deeper, decent growth in lion’s share contributor - Fire insurance (+11%) as well as Motor insurance (+8%) made up for the shortfall in Marine, Aviation and Transit (+1%) insurance segments.

Meanwhile, other income surged by 66% mainly boosted by the PBBANK share sale gain coupled with decent growth seen in commission income (+8%). At the operating profit level, netting off the PBBANK share sales gain, core EBIT improved by a wider quantum of 15% underpinned by lower claims incurred ratio of 40.5% (-2.8ppts) despite the slight tick ups in net commission (+0.2%) and management expense ratios (+0.6ppts). As a result, the combined ratio dropped to 67.3% (-2.1ppts). Meanwhile, core annualised ROE remained stable at 18.5% (vis-à-vis FY15’s 18.6%).

Meanwhile on QoQ basis; while 3Q16 total income (ex-PBBANK share sales gain) improved marginally by 3%, the group’s core EBIT performed with a stronger growth of 18% on lower combined ratio of 65.8% (-1.7ppts). This was on the back of lower claims incurred (- 1ppts) and management expense ratios (-1.8ppts). Coupled with lower effective tax rate of 20% (vis-à-vis 2Q16 ETR of 24%), core NP improved by 25%.

Bucking the weak industry trend. While industry growth is expected to grow modestly at 2.5-3.5% for 2016 as forecasted by PIAM, the group is targeting to register 5% growth in terms of Gross Written Premium (GWP); a forecast which is also shared by us (at 4.7% for FY16), on the back of its Fire Insurance segment. Recall that the group has registered 4% GWP growth in 1H16 vis-à-vis a modest 3% growth registered by the industry. Notably, the group has also been appointed the main insurer for MRT Line 2, which marked the second insurance business from MRT. Although we gather that the GWP from MRT Line 2 is <5% as of its group’s FY16 GWP (with more re-insurers), we see this milestone as a recognition from a leading construction player which boosts its reputation.

Maintain MARKET PERFORM with higher TP of RM16.55. Post model updates, our FY16E-FY17E NP estimates have been marginally tweaked up by 2-3% for house-keeping purposes. Hence, our TP has been raised to RM16.55 (from RM16.16). This is based on a blended FY17E PER/PBV ratio of 19.0x/2.7x (both based on LPI’s +1SD above its 5-year PER and PBV).

Risks to our call include: (i) lower premium underwritten, hence growth, and (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 7 Oct 2016