1QFY20 NP of RM78m is within expectations on the back of higher Gross Earned Premiums and stable investment income. We reiterate our OP call and TP of RM15.90 as investors should capitalise on its current weak share price for its relatively stable business structure (with Public Bank’s backing) and solid dividend yield of c.5% to boot.

Meeting expectations. 1QFY20 net profit of RM77.9m made up 24% of our and consensus full-year expectations. No dividend declared as expected.

YoY, 1QFY20 operating revenue of RM404m (+3%) grew on the back of slightly higher gross earned premiums (GEP) by 20bps to +2.6% underpinned by strong performance from the Motor and Miscellaneous Insurance segments at +9.6% and +8.3%, respectively. Fire and the Motor, Aviation and Transport segment saw declines of 4.1 and 3.5%, respectively. Marginal rise seen in Net Earned Premium (+0.6%) as retention ratio fell 130bps to 64.5% with combined ratio falling 3ppt to 71.2% as Claims incurred ratio fell 1ppt to 46.3%. Total revenue saw a slightly higher performance (+3.7%) due to relatively stable investment income (+5.5%). However, net profit inched up a marginal 1% to RM78m dragged by higher expenses (+12%) to RM105m due to fair value loss of RM8m (in unit trust funds, equity and corporate bonds).

QoQ, revenue dipped marginally (-0.3%) to RM312m as GEP fell 3% to RM368m dragged by the Fire Insurance segment (-9%). The marginal fall in revenue was mitigated by higher investment income (+85%) to RM36m. Net profit of RM78 (-10%) was dragged by higher expenses (+17) due to the RM8m losses in Fair Value.

Risks manageable. Bolstering itself from the economic uncertainties, the group looks to offer a greater range of products (i.e. medical, health, liabilities) while widening its agency force (targeted agent base growth of 10% annually). The Group will also review its digital transformation plan in order to create a more agile and digitally-enabled business providing enhanced flexible support to its business partners and customers. As business and consumer confidence are impacted by uncertainties, LPI believes the impact on claims will be relatively manageable. Though the other segments (motor, marine, aviation & transit, and miscellaneous) are more susceptible to volatile market conditions, we see LPI as having a more sustainable business model given its tightly held and dependent holding interests. Earlier market whispers of other competitors potentially losing out of banca partnerships may be a significantly less prevalent risk.

Post results, our FY20E earnings are relatively unchanged as results are in line.

Maintain OUTPERFORM and TP of RM15.90. Keeping earnings unchanged, we maintain our 3.0x FY20E PBV valuation (close to the stock’s 3-year forward average), a level which we believe the market can support as the stock has firm backing from Public Bank. While LPI’s projected earnings growth (2-4%) may not be exciting, we find the stock attractive for its stable outlook and well-guarded business model amidst market volatilities. Furthermore, its 5% dividend yield could appeal to yield-seeking investors assuming the group maintains its 2- year historical payout of c.86%.

Source: Kenanga Research - 5 May 2020