INVESTMENT HIGHLIGHTS

• Results came in within expectations

• Remains a performing player in the industry

• Earnings forecast remains unchanged for FY18 and FY19

• Maintain NEUTRAL with unchanged TP of RM16.70

Within expectations. LPI Capital reported 3QFY18 core earnings of RM91.7m, posting a slight decline of -0.2%yoy. Nonetheless for cumulative 9MFY19, core net earnings recorded an uptick of +1.0%yoy to RM230.1m. Accordingly, this translated to 75.4% and 71.9% of ours and consensus full year estimates.

Stable growth through tough times. Recent uncertainties such as the review of major infrastructure projects, an oversupply in the property market and deregulation, have all resulted in a slower demand and competitive environment for general insurance. However, LPI Capital’s operating revenues grew marginally +1.6%yoy to RM1,124.6m in 9MFY18. This was mainly attributable to the dividend income and interest income received as part of operating revenue, which grew by +12.2%yoy and +10.3%yoy respectively. Similarly, the 9MFY18 net earned premium income climbed +8.6%yoy to RM676.7m, which was due to the higher retention rate and lower claims ceded to reinsurer. This could indicate LPI Capital’s ability and confidence to retain risk in its portfolio even amid volatile market. To put this into perspective, the general insurance industry reported a mere 0.7% growth in its gross premium written in 1HFY18.

Combined ratio increased slightly. The group’s combined ratio recorded a net increase of +1.4ppts yoy, from 64.3% in 3QFY17. This was due to the surge in the group’s management expense ratio and commission ratio, which grew by +1.9ppts yoy and +2.7ppts yoy respectively. This translated to a -1.4ppts yoy drop in the group’s 3QFY17 underwriting margin to 34.3%. The increase in commission ratio was mainly attributed by the lower reinsurance commission received as the group sought to retain more risks on their own and reduced reinsurance ceded. Recall that the industry average of combined ratio was 92.3% as at 30 June 2018.

…and prudent underwriting and pricing discipline provided cushion. Its overall 3QFY18 claims ratio experienced a decline of -3.2ppts yoy from 40.3% of the same period last year as the net claims incurred by Motor, Miscellaneous and Fire segment declined -53.5%yoy, -28.6%yoy, and -9.2%yoy respectively. This translated to an average growth rate of +2.5%yoy of underwriting surplus in 3QFY18. The growth was mainly driven by Motor segment, climbing +44.3%yoy while moderated by Fire and Miscellaneous due to lower net earned premiums and higher net claims incurred respectively in the quarter.

Earnings estimates. We maintain our FY18 and FY19 earnings forecast given the results were in line with our expectations.

Recommendation. Despite the recent economy slowdown and uncertainty, our outlook on the group’s business remains rather neutral at this juncture as it has a track record of financial strength and profitability to cushion imminent downside scenario risks. The group also has a ratio of cash flow from operating activities to net income of 126.5% (RM291m/RM230m), indicating sufficient cash flow to meet its obligations and even pay dividend to its shareholders. Despite this, we maintain our NEUTRAL stance on LPI Capital as we take into account potential headwinds from the liberalisation of motor and fire tariff (which is under review) and current uncertain environment affecting the infrastructure landscape where LPI is an active player. Our TP of RM16.70 is also unchanged as we peg its FY19F core EPS to PER of 18.6x.

Source: MIDF Research - 11 Oct 2018