INVESTMENT HIGHLIGHTS

• 1HFY19 core profit increased by +4.6%yoy to RM146.2m which came in within our expectations

• Resilient top-line growth with 1HFY19 gross written premium (GWP) rose by +5.1%yoy to RM827.5m

• Further deterioration in combined ratio expected amidst the motor and fire insurance liberalisation exercise

• First interim dividend of 27.0sen declared, on track to meet dividend forecast of 70.0sen for FY19

• Maintain NEUTRAL with an unchanged TP of RM16.20

Results came in within expectations. LPI Capital’s (LPI) 1HFY19 core earnings grew modestly by +4.6%yoy to RM146.2m, accounting for 44.3% and 43.9% of our and consensus’ full year FY19 estimates. The increase in core profit was mainly attributable to higher net earned premiums (NEP) which rose by +10.4%yoy to RM487.6m. Note that the higher NEP was largely due to a combination of higher GWP collected (+5.1%yoy) and lower reinsurance ceded (-2.2%yoy). Similarly, 2QFY19’s core profit also increased by +5.5%yoy to RM69.8m, mainly due to higher NEP (+11.9%yoy) but partially offset by higher claims expenses (22.8%yoy).

Steady top-line growth amidst tough operating environment. In 1HFY19, the group managed to achieve a higher GWP (+5.1%yoy) of RM827.5m despite general insurance industry is experiencing declining GWP and negative growth in all classes of insurance. In perspective, the industry registered a decline of GWP of -7.6%yoy in 1QCY19. We are of the view that the group’s higher GWP was a result of the resumption of government infrastructure works and the strengthening of its distribution channels in 2QFY19. In addition, the motor and fire liberalisation exercise also has been putting downward pressure on premium pricing in order to maintain market share.

However, combined ratio is deteriorating. LPI’s 1HFY19’s combined ratio rose marginally by +1.8ppts yoy to 73.1%. This was mainly attributable to the rise in claims ratio by +2.2ppts yoy to 46.1%. Meanwhile, the higher claims ratio was in turn caused by the jump in net claims incurred by +15.9%yoy to RM225.0m. We posit that this was partially due to the group seeking to retain more risks as reflected by the increase in retention ratio. Nonetheless, underwriting profit increased modestly by +3.4%yoy to RM131.3m due to higher NEP. Moving forward, we opine that heightened competitive pricing pressure might continue to add pressure on claims ratio.

Dividend. In 2QFY19, the group declared its first interim dividend of 27.0sen per share, amounting to a total payment of RM107.6m. This is on track to meet our full-year dividend forecast of 70.0sen, representing a pay-out ratio of 73.0%.

Earnings estimates. We are maintaining our forecasts for FY19F and FY20F.

Target price (TP). We are maintaining an unchanged TP of RM16.20 by pegging its FY20 Core EPS to PER of 18.65x (5-year historical average).

Maintain NEUTRAL. While the group’s earnings momentum remains resilient, we remain cautiously optimistic of its growth prospects given the escalating competition in the general insurance segment due to the motor and fire liberalisation exercise. Note that LPI’s fire and motor insurance accounts for about 65.0% of total GWP, whereby fire alone contributes approximately 64.0% of total underwriting surplus before management expenses. Thus, the allowable deviation of up to ±30.0% for the pricing of new fire products and potentially further fire liberalisation would likely take its toll on LPI’s earnings moving forward. In addition, the possible further deterioration in claims ratio amid price war might cause the group’s combined ratio to worsen. Nonetheless, the resumption of some government infrastructure works and improved domestic economic conditions coupled with the group’s prudent underwriting practices would partially supporting it to weather the structural change in the industry. All factors considered, we maintain our NEUTRAL stance on LPI Capital.

Source: MIDF Research - 16 Jul 2019