Kenanga Research & Investment

LPI Capital - Fairly Valued Amidst Near-Term Troubles

Publish date: Wed, 03 Aug 2022, 09:28 AM

1HFY22 CNP of RM118.3m (-29%) and interim dividend of 25.0 sen are within our expectations but missed consensus. The insurance space could benefit from rising demand as economic activities recover, but LPI may see headwinds with further liberalisation of fire insurance possibly compressing topline and normalising claims ratio on bottomline. Maintain MP and TP of RM14.10. There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us.

1HFY22 in line with our expectations, but missed that of consensus, while reported net earnings of RM118.3m made up 46% and 37% of respective estimates. We suspect the miss on the street’s part could be due to overly optimistic GWP growth expectations. The interim dividend of 25.0 sen declared is also within, close to our anticipated 85% payout ratio.

YoY, 1HFY22 NEP reported at RM470.6m (-6%), mainly dragged by lower contributions in the miscellaneous segment (-16%) on higher unearned premium provisions alongside softer Motor (-6%). Meanwhile, the lion’s share fire insurance NEP was stable (-1%) while M.A.T. rose by 8% albeit being a miniscule contributor to the group. Although retention ratio was flattish (62%), claims ratio surged to 46.9% (+9.5ppt) with the return in economic activity bringing a rise to claims instances. This drove 1HFY22 combined ratio to 75.0% (+10.7ppt). All in, 1HFY22 net profit came in at RM118.3m (-29%).

QoQ, 2QFY22 NEP improved by 17% on better overall sequentially better performance in key segments. We reckon this is stirred by the progressive pick-up in economic movements which translates to greater insurance requirements. On the flipside, claims incurred ratio was somewhat stagnant at 46.8% but with higher commission expenses (6.0%, +2.7ppt) on greater agency activities. However, due to the drag in investment income (-58%), 2QFY22 NP was sequentially weaker at RM56.8m (-8%).

Challenges ahead. The group is expected to be led by its key fire insurance segment, benefitting from the rise in mortgage applications in prior years. Still, detariffication reviews are likely to keep premiums competitive and compress earnings potential. The normalisation of claims (mainly motor) should also persist as lower incidence rates in prior years thanks to movement restrictions are unlikely to repeat (i.e. FY21: 36.5% vs. historical average: 40%). On the flipside, the group will now be able to mobilise more aggressive agency strategies to regain lost ground, but may fall short in terms of digital channels as opposed to its peers.

Post results, we tweak our FY22E/FY23E assumptions by -2% each from earnings updates.

Maintain MARKET PERFORM and TP of RM14.10. Our TP is based on an unchanged 2.5x FY23E PBV, based on a 25% premium against the historical forward PBV of industry peers. We believe the premium is justified based on the group’s better dividend prospects and share price resiliency. Though the group has the backing of a sizeable financial institution (i.e. Pubic Bank), the lack of guidance in terms of 2023 MFRS 17 adjustments may leave investors on the fence. Hence, we believe the risk-reward for the stock may be balanced for now.

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

Source: Kenanga Research - 3 Aug 2022

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