KEY INVESTMENT HIGHLIGHTS

• LPI’s 2Q20 core earnings came in within expectations
• 2QFY20 normalized earnings contracted 6%yoy and 15%qoq to RM66m
• Slight uptick in combined ratio sequentially, but lower yearon-year
• Claims ratio declined against 1Q20 driven mainly by motor and marine, aviation & transit segments
• Maintain NEUTRAL at unchanged TP of RM11.70

Within expectations. LPI Capital (LPI) reported 2Q20 core net profit of RM66m, bringing its 1H20 core earnings to RM151m (excluding fair value gains of RM5m). This is within estimates accounting for 54% of ours and 50% of street’s FY20F respectively.

Flattish, despite MCO period. The group’s 2Q20 core earnings was down 6%yoy and 15%qoq. 2Q20 claims ratio ticked up marginally to 45.6% (+0.7ppts yoy) but was slightly lower on quarter-on-quarter basis (-0.7ppts qoq) driven mainly by the reduction in net claims for the motor division (-10%qoq, possibly due to lower traffic during MCO) and marine, aviation & transit division. This was partly offset by an increase in net claims for the fire (+39%qoq) segment.

Resilient combined ratio. Combined ratio remained stable at 71.9%. This was a marginal 0.5ppts uptick against 1Q20 combined ratio of 71.4%, but is 0.4ppts lower year-on-year. The sequential increase in combined ratio was driven mainly by an increase in commission ratio which was partly offset by lower net claims. Underwriting profit grew to RM71m, up 1.2%yoy. On sequential basis, the 2Q20 underwriting profit registered a 4%qoq increase as the higher combined ratio was more than offset by a 6% increase in net earned premiums.

Recommendation. We maintain our NEUTRAL call on LPI at unchanged TP of RM11.70, pegging LPI at an unchanged 16x FY21F earnings, at 1SD below its 5-year historical average to take into account the subdued business environments arising from the Covid-19 outbreak. Nevertheless, despite concerns on the weak macro environment, we take comfort in the group’s relatively low combined ratio which provides larger headroom to maneuver through these uncertain times, coupled with the group’s ability to generate adequate positive cash flow for its operations.

Source: MIDF Research - 18 Aug 2020