• LPI Capital’s (LPI) 2QFY17 core net profit of RM68.1m slightly below our expectation.

• Earnings drop from lower gains in equity investment.

• Growth in NEP still persists on the back of strong underwriting performance.

• 27.0sen a share Dividend for 2QFY17.

• No change in forecast.

• Maintain NEUTRAL with revised TP of RM18.91 (from RM18.78)

LPI Capital’s (LPI) 2QFY17 core net profit of RM68.1m slightly below expectations. For 6MFY17, earnings came in slightly below our expectations at 43.2%, while in-line with consensus’ at 45.1% of fullyear estimates. The drop in earnings was due to lower gain on disposal stemming from lower realisation from its equity investments. In 6MFY16 the gains recorded was RM150.4m vs. RM2.5m in 6MFY2017.

Growth in NEP still persists. However, NEP recorded better than expected sequential quarter growth at +18.6%qoq. In terms of yearly growth, it was +5.0%yoy. The positive variance in NEP is attributable to strong underwriting performance, with underwriting profit expanding by +9.6%yoy to RM129.0m. It was also due to improvements in its cumulative claims incurred ratio from 41.3% for 6MFY17 to 39.8% same period last year.

First Interim Dividend of 27.0sen. Despite the earnings decline, the group proposed a dividend of 27.0sen a share for 2QFY17, a growth of +8.0%yoy from 25.0sen a share in 2QFY16.

No change in forecast. Although the earnings came in slightly below our estimates, we believe that the group will be able to rebound in 2HFY17 on better domestic economic performance. We note that the decline in overall earnings is non-recurring and the profit from insurance unit through the group’s subsidiary Lonpac Insurance is still stable at +6.1%yoy. We believe the Group will continue to deliver reasonable growth rate performance and sustain its solid balance sheet to yield long-term shareholder value. Thus, we maintain our earnings forecast.

Recommendation. Correspondingly, we also maintain our NEUTRAL stance on the stock with an adjusted TP of RM18.91 (from RM18.78). Our TP adjustment stemmed from a change in our valuation method from sum-of-the-parts to price to earnings method, as we opine that it better reflects its earnings going forward. Our TP is based on pegging its FY18 EPS to PER of 19x which is 2 standard deviation below its 5-year historical average.

Downside risk to our call are 1) slower than expected growth in premium contribution, 2) higher than expected combined ratio especially from motor segment, 3) lower than expected underwriting profit coming from stiff price war.

Source: MIDF Research - 11 Jul 2017