INVESTMENT HIGHLIGHTS

• 1QFY18 core profit results came in within expectations

• However, underwriting margin reduced marginally due to increased claims and commission expenses

• FY19 and FY20 earnings forecast revised downward slightly by -1.3% and -3.0% due to the potential complete detariffication of fire insurance in FY19/20

• Nonetheless, the continuation of infrastructure projects by the Government might lend support in spurring the group’s premium income

• Maintain NEUTRAL with revised TP of RM16.20 (previously RM16.10) as we rollover our valuation base year to FY20

Within expectations. LPI Capital’s 1QFY19 core earnings grew by +5.5%yoy to RM76.4m. Accordingly, this translates to 22.8% and 22.6% of ours and consensus’ full year FY19 estimates. The modest improvement in core profit was mainly attributed to higher net earned premiums (NEP). Note that the higher NEP was largely a result of lower reinsurance ceded instead of higher premium collected.

Less risk ceded led to higher claims. LPI Capital’s 1QFY19 retention ratio was increased by +3.9ppts yoy. As a result of ceding less to reinsurers, the group was able to boost the group’s NEP by +8.9%yoy while its gross earned premiums (GEP) only grew by a mere +2.4%yoy. The growth in NEP was mainly coming from its motor, fire and miscellaneous insurance which grew by +14.9%yoy, +4.4yoy and +9.2%yoy respectively. However, the increase of NEP has been partially offset by the higher net claims incurred of –RM111.8m (+9.7%yoy). This was mainly due to the increase in net claims from marine, aviation and transit (MAT) and miscellaneous segment by +49.3%yoy and +19.9%yoy respectively. We view that this move could be potentially backfired and led to lower profit if it is not for the prudently underwritten fire and motor insurance portfolio where net claims incurred fell by -5.4%yoy and -14.2%yoy respectively.

Underwriting margin narrowed. 1QFY19’s combined ratio has posted an uptick of +0.7ppts yoy to 73.9%. While the group’s management expense ratio has improved to 21.2% (-1.2ppts yoy), it wasn’t enough to buffer for the increase of both claim and commission ratio by +0.4ppts yoy and +1.6ppts yoy to 47.4% and 21.2% respectively. As a result, this has translated to an underwriting margin of 26.1%, a dip of -0.7ppts yoy. Nonetheless, underwriting profit registered at RM61.5m which grew by +5.9%yoy due to the increased NEP of the quarter.

Earnings estimates. We revised the earnings forecast of FY19 and FY20 downwards to RM329.8m and RM346.2m, representing a -1.6%yoy and -3.0%yoy adjustment in view of the increased competition and pricing pressure in the industry. This is in view of to the potential full fire de-tariffication upon review of the progress on the phased liberalisation in 2H19 amid a weaker consumer sentiment.

Target Price (TP). We roll forward our valuation base year to FY20 and arrive at a revised TP of RM16.20 (from RM16.10). This is derived from pegging its FY20 Core EPS to PER of 18.6x (5-year historical average).

Maintain NEUTRAL. The general insurance industry is on a plateau as the industry is facing structural change due to the complete liberalisation of motor and fire insurance in FY19/20. These segments constitute about 32% and 41% respectively of LPI Capital’s NEP where fire insurance alone contributes around 68% of the group’s underwriting surplus. To recall, the final phase of the fire insurance liberalisation will likely take place in 2H19 after the review by BNM in June. The effect would be that more competitively-priced products released by insurers to gain market share which will put pressure on margin. Nonetheless, the renewed government’s approvals and commitments to previously stalled infrastructure projects will help spur demand of project insurances where LPI Capital is an active player. In addition, the group also has a ratio of cash flow from operating activities to net income of 217.9%, indicating sufficient positive cash flow to continue expanding its operation. All in, we maintain our NEUTRAL stance on LPI Capital.

Source: MIDF Research - 16 Apr 2019