Within house expectation. The group reported 4Q16 core net profit (NP) of RM81.5m (+5% QoQ; +25% YoY), bringing FY16 core NP to RM286.9m (+17%) which made up 104%/89% of our/consensus’ full- year estimate, respectively. Note that the FY16 core NP has been adjusted by netting off the PBBANK share sales gain of RM150.3m. To our positive surprise, a second interim dividend of 55.0 sen was declared, bringing full-year DPS to 80.0 sen which topped our/consensus’ FY16E DPS of 70.0 sen/71.0 sen.

YoY, FY16 revenue increased by 7% driven by the higher gross earned premium (+7%) seen in the general insurance segment. Decent growths in lion’s share Fire insurance (+8%) as well as Motor insurance (+10%) made up for the shortfall in Marine, Aviation and Transit (-4%) insurance segments. Meanwhile, other income surged by 35% mainly boosted by the PBBANK share sale gains coupled with decent growth seen in commission income (+8%). At the operating profit level, by netting off the PBBANK share sales gain, core EBIT improved by a wider quantum of +16% underpinned by lower claims incurred ratio of 38.3% (-2.7ppts) despite the slight tick ups in net commission (+0.2%). As a result, the combined ratio dropped to 64.6% (-2.9ppts). Meanwhile, core annualised ROE improved to 18.2% (vis-à-vis FY15’s 15.4%).

Meanwhile on QoQ basis; while 4Q16 total income improved marginally by c.1%, the group’s core EBIT outperformed with a stronger growth of 9% on a lower combined ratio of 57.5% (- 8.4ppts). This was on the back of lower claims incurred (-6.2ppts) and management expense ratios (-2.1ppts). However, with higher effective tax rate of 23.8% (vis-à-vis 3Q16 ETR of 20%), core NP improved by a smaller quantum of 5%.

Comfortably welcoming the liberalisation of Motor and Fire insurance tariffs. While the general perception is that the de- tariffication of Motor and Fire insurance could trigger greater intensity of competition among the insurers, thus leading to margin compression, we are comforted by management’s strategy that will be supported by a bigger team actuarial team, investment in new systems as well as its strategic portfolio exposure, which has relatively low exposure to the Motor segment compared to other insurers. On top of that, the group has also been appointed the main insurer for MRT Line 2; which marked the second insurance business from MRT. Although the Gross Written Premium (GWP) from MRT Line 2 is <5% as of its group’s FY16 GWP (with more reinsurers), we see this milestone as a recognition from a leading construction player which boosts its reputation.

Maintain MARKET PERFORM with higher TP of RM17.30 (from RM16.55). Post model updates, our FY17E NP has been tweaked up by 4% for house-keeping purposes. Hence, our TP has been raised to RM17.30 (from RM16.55). This is based on a blended FY17E PER/PBV ratio of 19.4x/2.8x (both based on LPI’s +1SD above its 3-year PER and PBV). Risks to our call include: (i) lower premium underwritten, hence growth, (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 07 Feb 2017