9MFY17 CNP came in within expectations. Absence of DPS was also as expected. Though the detariffication of Motor and Fire insurance could trigger greater intensity of competition among the insurers, we are comforted by the group’s strategies in embracing the new trend. We made no changes to our FY17E/FY18E NP as our assumptions are still intact. Maintain MP with an unchanged TP of RM18.10.

Within expectations. The group reported 3QFY17 core net profit (NP) of RM92.2m (+35% QoQ; +19% YoY), bringing 9MFY17 core NP of RM230.8m (+12%) which made up 75% both of our/consensus fullyear estimates. As expected, no dividend was declared under the quarter reviewed.

YoY, 9MFY17 revenue increased by 8% driven by the higher gross earned premium (+9%) seen in the general insurance segment. Decent growths in lion’s share Fire insurance (+9%) as well as Miscellaneous insurance (+38%) made up for the shortfall in Motor (-1%) as well as Marine, Aviation and Transit (-25%) insurance 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 the headline EBIT dropped by 29% in the absence of PBBANK share sales gains this year (recall that 9M16 EBIT of RM410.3m was boosted by an one-off capital gain of RM150.4m from the disposal of PBBANK share sales), core EBIT has, in fact, improved by 12%, further augmented by lower claims incurred ratio of 40.0% (-0.5ppts) despite up-ticks in net commission ratio (+0.2ppts). Coupled with lower management expense, the combined ratio improved to 66.5% (-0.8ppts). Meanwhile, core annualised ROE improved to 20.6% (vis-à-vis 9MFY16 ROE of 18.5%).

Meanwhile on QoQ basis, while 3QFY17 total income improved by 16% on stronger net earned premium (+9%, rebounded from a seasonally lower base in the last quarter), core NP expanded by a larger quantum of 35% on much lower combined ratio (-3.2ppts) on lower management expenses as well as a lower effective tax rate of 19.9% (vis-à-vis 23.7%).

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 our concerns are on the undercutting of premium pricing that could induce greater competition, we understand that there are, in fact, not many premium revisions seen thus far among the new motor insurance products, thanks to the riskbased capital framework in place as well as the thinner margins that motor insurance is carrying. Another plus point that is sheltering the group from the stagnating motor insurance is its limited portfolio exposure which contributes 21% of the group’s 1H17 gross written premiums (GWP), vis-à-vis other big players that have >50% exposure as well as the niche focus in the comprehensive and private car which gives better experience ratings.

Maintain MARKET PERFORM with an unchanged TP of RM18.10. We made no changes to our FY17E/FY18E NP as our assumptions are still intact. Hence, we maintain our TP of RM18.10 with an unchanged 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, hence growth, and (ii) higher-than-expected combined ratio.

Source: Kenanga Research - 10 Oct 2017