• LPI Capital’s (LPI) FY16 recurring net profit of RM289.2m were above ours but below consensus expectation

• Its 4QFY16 earnings was higher at RM83.0m, thanks to healthy underwriting profit margin

• We revised higher our FY17 earnings forecast

• Accordingly, we reaffirm our BUY recommendation with higher TP of RM18.78

Above expectation. Excluding non-recurring income item of RM148.0m, LPI’s FY16 recurring net profit came in at RM289.2m (+18%yoy). It was above our expectation but comparatively, it only made up 90% of full-year consensus’ estimate.

Another sturdy quarter recurring earnings. In 4QFY16, the Group’s recurring earnings grew to RM83.0m (+27%yoy and 2.7%qoq), which was partially contributed by lower claims recognition as a result of better claims management system on Malaysian Motor Insurance Pool (MMIP) that was previously overstated. The growth in bottom line was also supported by lower management expenses of RM37.7m (-9%yoy and - 5%qoq) and higher net earned premium of RM210.3m (+6%yoy and +6%qoq) despite its gross written premium was rather flattish at RM265.9m. The increase in net earned premium reflected lower premium ceded to reinsurers, which translate into higher retention ratio of 79% (+4.1ppts yoy and 14.8ppts qoq). All in, the underwriting profit margin was healthy at 43.3% (+5.1ppts yoy and +8.3ppts qoq).

Second interim dividend of 55sen. The Management has declared a second interim single tier dividend of 55sen in respect of FY16. This brings up total dividend of 80sen for FY16.

Impact on earnings. We revised higher our FY17 earnings forecast by 11% to take into account its higher retention ratio. This may allow it to capture more premium income due to its robust capital position. As such it will allow the Group to retain more of its premium and able to withstand better the de-tariffed market. The revision also reflects improvement in its claims ratio. However, we expect its claims recognition from MMIP will start to normalise this year.

Recommendation. Accordingly, we reaffirm our BUY recommendation with higher TP of RM18.78. We derive our TP based on FY17 sum-ofparts valuation. We believe the Group will continue to deliver doubledigit earnings growth and maintain prudent risk management

Source: MIDF Research - 7 Feb 2017