Kenanga Research & Investment

LPI Capital - Opportunities Amid Softer Reporting

Publish date: Tue, 18 Oct 2022, 09:00 AM

9MFY22 net earnings of RM193.0m (-29%) is within our expectations as higher claim ratios were not surprising. We maintain our TP of RM14.10 but upgrade our call to OP (from MP) from the under pricing of the stock’s strong fundamentals in a normalising sector landscape. Challenges in the fire insurance segment could be mitigated by its firm positioning in the space while ROE could remain buoyant from pending accounting adjustments.

9MFY22 met our expectations. 9MFY22 reported net earnings of RM193.0m made up 77% of our full-year forecast but missed consensus full-year estimate (71%). We believe the negative deviation on the street’s part was due to under-accounting of rise in claims from the re-opened economy. No dividends were declared this quarter as the group typically pays biannually.

YoY, 9MFY22 NEP declined by 5% owing to lower contributions in the miscellaneous segment (-11%) on higher unearned premium provisions. There was also softening in the key fire insurance segment’s NEP (-2%) and Motor (-4%), although the minor Marine, Aviation & Transit segment supported (+8%) earnings. Stable retention ratio (63%) suggests risk profiling could be optimal but claims ratio rose to 45.4% (+9.3ppt) as claims instances normalise on returning economic activity. This was the leading driver for a higher combined ratio (73.9%, +11.0 ppt) during the period, which translated to a 9MFY22 net profit of RM193.0m (-29%).

Higher competition to sprout. The detariffication of the group’s key fire insurance segment could pose some top-line stress to the group amidst more liberal pricing ranges in the market. Possible compression of housing loan applications in a rising interest rate environment may further exacerbate the situation. On the flipside, continual demand for new automobiles could translate to supportive motor premium readings in the coming quarters. Meanwhile, we believe pressure from claims would stabilise in the near term which may keep retention rates at more optimal levels. Historically, claim readings averaged at 40% against YTD levels of 45%.

Forecast. Post results, we leave our FY22F/FY23F assumptions unchanged. 

Upgrade to OUTPERFORM (from MARKET PERFORM) with TP of RM14.10. Our TP is based on an unchanged 2.5x FY23F PBV, based on a 25% premium against the historical forward PBV of industry peers. At current price levels, we believe there are buying opportunities as LPI’s premium remains justified based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank. Additionally, the group may be a beneficiary of 2023’s new MFRS 17 adjustments owing to their higher mix of longer-termed policies (i.e. fire). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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

Source: Kenanga Research - 18 Oct 2022

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