INVESTMENT HIGHLIGHTS

• Results came in within expectations

• Growth driven by strong demand for fire insurance

• We maintain our earnings forecast for FY18, while revising down our FY19’s

• NEUTRAL with adjusted TP of RM16.69 as we rollover our valuation to FY19.

Within expectations. LPI Capital reported 1QFY18 net profit of RM72.5m, posting a growth of +2.8%yoy. However, LPI’s core profit growth was higher at +4.8%yoy. The 1QFY18 net profit came in within ours and consensus forecasts, accounting for 22.0% and 20.1% of full year estimates respectively.

Growth of gross earned premium set a positive tone for the year. The group reported operating revenue of RM381.0m in 1QFY18, climbing up by +9.6%yoy. Accordingly, gross earned premium followed suit with an encouraging growth of +9.9%yoy to RM349.7m. We opine the upward trajectory as commendable, beating our +5.3% growth forecast for the full year. We noted that overall premium was largely driven by fire class which grew by +21.6%yoy. Meanwhile for the motor class, premium recorded +7.9%yoy higher to RM66.7m. It is worth noting that motor and fire classes represent about 30.8% and 42.5% of overall net earned premium respectively. Given the large representation of both segments on premium income, we opine that further improvement on the group’s overall earnings is likely throughout the year.

However, the jump in claims is a concern. LPI’s net claims incurred came in +42.8%yoy higher in 1QFY18 to RM101.9m. This was attributable to higher motor insurance claims by +46.5%yoy from the same period last year. Overall, this translated to loss/claims ratio of 47.1% for the group, which was +7.2ppts yoy higher. Moving forward, we opine that loss ratio is likely to taper down due to high base effect, supported be the group’s selective risk underwriting for its motor class following the phased liberalisation.

Resulting to higher combined ratio. The group’s combined ratio recorded a net increase of +9.3pptsyoy, from 63.8% in 1QFY18. This was due to the surge in the group’s overall claim expenses, which translated to a -9.3ppts yoy drop in the group’s 1QFY18 underwriting margin.

Underwriting surplus grew at an average of +5.8%yoy in 1QFY18. The growth supported by almost all segments including Fire, MAT and Miscellaneous. However, it was dragged by motor class due to its substantial decline of - 78.0%yoy.

Impact to earnings. Given that earnings came in within estimates, we maintain our FY18 numbers at this juncture. However, we are fine-tuning our forecast in FY19; taking into account the higher than expected claims expenses. Accordingly, we revised our growth assumption on claims to approximately +15.0%yoy. This will contract our core net profit assumption by -10.3% to RM358.0m.

Recommendation. Throughout the year, we believe the group is expected to improve its performance based on the consistent premium growth, driven by the group’s main classes of general insurance namely fire and motor. While we are optimistic on the growth trajectory of the group’s revenue, we believe challenging industry’s headwinds such as higher than expected claim expenses also poses threat to its profitability. Taking that into account, we are maintaining our NEUTRAL call on the stock. Rolling over our valuation to FY19, we are adjusting our TP is higher to RM16.69

(from RM15.76), pegging the EPS to PER of 19x. Overall, we opine that the group will potentially record improvement in earnings this, stemming from positive economic outlook. This is further coupled with the group’s ability to strengthen its market share in the general insurance market, supported by the group’s standing as the country’s largest property underwriter.

Source: MIDF Research - 27 Apr 2018