1HFY21 Core Net Profit (CNP) of RM166.2m (+7%YoY) is within our/consensus’, expectation at 48%. DPS of 29.0 sen is also as expected. Despite keeping earnings unchanged (4Q to make up for 3Q), we think our previous ascribed valuations could be on the higher end (2.8x PBV; +1SD). Accordingly, we peg a lower 2.6x PBV (mean) to rolled-over FY22E BVPS. Downgrade to MARKET PERFORM with a lower TP of RM14.20. Dividend yield of ~5% provides a safety net.

Within expectations. 2QFY21 registered CNP of RM83.9m (+2% QoQ; +8% YoY), bringing 1HFY21 CNP to RM166.2m (+7% YoY), which is within our/consensus’ estimates, both at 48%. First interim dividend of 29.0 sen is also within expectation. LPI usually declares dividends concurrent with its 2Q and 4Q quarterly results announcements. The group has also consistently raised DPS by 2.0 sen every year since 2018, and we expect the trend to continue.

Result’s highlight. YoY, 1HFY21 CNP rose (+7%) as net earned premium (NEP) grew (+2%), while claims incurred ratio (CIR) fell (-8.5 ppt). NEP growth was driven by higher: (i) Fire (+3%), (ii) Motor (+4%), (iii) Marine, Aviation & Transit (+8%), but offset slightly by lower Miscellaneous (-2%). QoQ, despite lower NEP (-2%), 2QFY21 CNP rose (+2%) mainly due to a decline in other expenses (-97%) from lower FV losses of RM0.2m (vs. RM38.1m in 1QFY21).

Outlook. LPI’s earnings are seasonally stronger in 2H, with a 5-year average 1H/2H contribution breakdown of 45%/55%. While we think the trend of a stronger 2H should continue, the lockdown restrictions could still have an impact on 3QFY21. Thereafter, the Fire segment, which is its main contributor (~40% of NEP) and Miscellaneous (~23% of NEP), should see growth alongside physical businesses reopening. Meanwhile, its Motor segment (~35% of NEP) could benefit from pent-up automotive demand and the vehicle sales tax exemption (until 31 Dec 2021).

No changes to earnings estimate.

Lowering valuation. Despite results coming within expectations, we believe we could have been too optimistic with our previous ascribed 2.8x PBV valuation (+1SD from mean) especially given the current economic and political environment. Hence, we are now pegging a lower 2.6x PBV (implying mean) to a rolled-over FY22E BVPS. TP is reduced to RM14.20 (from RM15.10) with a downgrade to MARKET PERFORM. Our downgrade is premised on a lack of catalyst in the near term. However, dividend yield of ~5% provides a safety net.

Risks to our call include: (i) lower premium underwritten, (ii) higher-than- expected claims, (iii) higher/lower-than-expected management expense ratio, and (iv) further rounds of MCO.

Source: Kenanga Research - 6 Aug 2021