1H17 CNP came in within expectations. A first interim dividend of 27.0 sen was also announced as expected. Although the detariffication of Motor and Fire insurance could trigger greater intensity of competition among the insurers, we are comforted by the group’s strategy in embracing such new trend. We made no changes to our FY17E/FY18E NPs as our assumptions are still intact. Maintain MP with a higher roll-over TP of RM17.70.

Broadly within expectations. The group reported 2Q17 core net profit (NP) of RM68.1m (-4% QoQ; +9% YoY), bringing 1H17 core NP of RM138.6m (+9%) which made up 45% both of our/the consensus’ fullyear estimates. As expected, a first interim dividend of 27.0 sen (vs 2Q16: 25.0 sen) was declared during the quarter reviewed.

YoY, 1H17 revenue increased by 6% driven by the higher gross earned premium (+7%) seen in the general insurance segment. Decent growths in lion’s share segment- Fire insurance (+17%) as well as Miscellaneous insurance (+10%) made up for the shortfall in Motor (- 4%) as well as Marine, Aviation and Transit (-17%) segments. Note that the drastic drop in Marine, Aviation and Transit insurance segment continued to be dragged by the slower Oil & Gas activities. At the operating profit level, while headline EBIT dropped by 44% on the absence of PBBANK shares sales gain this year (recall that 1H16 EBIT of RM313.2m was boosted by an one-off capital gain of RM150.4 from the disposal of PBBANK shares sales), core EBIT has, in fact, improved by 8%, further augmented by lower claims incurred ratio of 39.8% (- 1.5ppts) despite up-ticks in net commission ratio (+1.5%). Coupled with lower management expense, the combined ratio improved to 67.8% (- 0.3ppts). Meanwhile, core annualised ROE improved to 15.3% (vis-à- vis 1HFY16’s 14.8%).

Meanwhile, on QoQ basis, 2Q17 total income improved by 8% on stronger net earned premium (+19%, rebounded from a seasonally lower base in the last quarter), but core NP dropped by 4% on higher claims incurred, management expenses as well as a higher effective tax rate of 23.7% (vis-à-vis 20.5%).

Well prepared for the liberalisation of Motor and Fire insurance tariffs. Note that Phase 2 of the framework on phased liberalisation of Motor and Fire Tariffs (whereby motor insurance for comprehensive cover and third party fire and theft will be detariffed) has commenced from 1st July 2017 onwards. While general perception is that the detariffication could trigger greater intensity of competition among the insurers, thus leading to margin compression, we were comforted by management’s strategy that will be supported by better 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.

Maintain MARKET PERFORM with a higher roll-over TP of RM17.70. While we made no changes to our FY17E/FY18E NPs as our assumptions are still intact, we roll over our valuation base year to FY18. Hence, our TP now is RM17.70 (from RM17.30), based on a blended FY18E PER/PBV ratio of 19.4x/2.8x (both based on LPI’s +1SD above its 3-year PER and PBV. Maintain MARKET PERFORM. Risks to our call include: (i) lower premium underwritten, and (ii) higherthan-expected combined ratio

Source: Kenanga Research - 11 Jul 2017