LPI's 9MFY24 results are deemed within expectations in anticipation of 4Q to come in softer. Its fire class insurance segment remains pressured by the industry's detariffication, though would acquire a stronger edge after the upcoming acquisition by PBBANK. This includes tapping into the latter's extensive branch network, more cross selling and higher flow-through from its industry-leading lending business. These are not reflected in our forecasts for now, pending its successful integration into the PBBANK group. Maintain OP and TP of RM15.00.

9MFY24 within expectations. LPI's 9MFY24 net profit of RM303.2m made up 80% of our full-year forecast and 82% of consensus full-year expectation. We deem this to be within expectations due to typically softer reporting in 4Q periods as claims may pick up on higher seasonal movements and dividend income to narrow.

YoY, 9MFY24 net earnings increased by 29% mainly from reversals of reinsurance reserves from past floods in its fire class insurance products.

This explains the gap in retention ratio of 8.9 ppts to 72.5%. That said, insurance service revenues have been flat due to weakness in the same fire class insurance products with detariffication pressing for more competitive pricing in the segment.

QoQ, 3QFY24 net profit expanded by 59%, attributed by higher service results across the board but mainly due to significantly lower claims in fire class insurance. Dividend income also supported earnings, due to larger biannual payments made during the period which drove investment income (+79%). Not including dividend returns, net income would have still improved by 37%, thanks to the abovementioned.

Highlights. With LPI facing sustained challenges in the fire insurance space following the industry's detariffication, we opine that the recently announced acquisition by PBBANK (OP; TP: RM5.10) is timely.

According to PBBANK previously, less than 25% of LPI's revenues are made up of referrals from PBBANK (mainly from its mortgage business), suggesting more opportunities to collaborate in the future. This could be more applicable to its non-residential mortgage and motor financing business of which in PBBANK's books stand at alone is presently at RM86.4b and RM72.3b, respectively while LPI's insurance contracts amount to RM2.3b. Further, LPI will be able to tap into PBBANK's 260- strong branch network for cross-selling with minimal investment on LPI's front.

Forecast. Maintained for now, with our assumptions yet to reflect any synergistic gains from PBBANK. Our forecast 3% decline in FY25F earnings is attributed to the subsiding of reversals in reinsurance reserves seen in FY24.

Maintain OUTPERFORM and TP of RM15.00. Our TP is based on an unchanged 2.6x FY25F PBV. This represents a 25% premium against the industry average of 2.1x which we believe is fair given: (i) better net margins of 17% (vs peer's 11%), and (ii) higher dividend returns of 6%- 7% (vs peer's 4%-5%). LPI's premium valuation may also be supported by its long-term viability from its affiliation with Public Bank with the pending acquisition further solidifying synergies. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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 - 30 Oct 2024