FY14 core profit  of MYR223m  met expectations  as  UW  margins  surged 120bps  while full-year DPS amounted to  75  sen  (4% yield). Downgrade to NEUTRAL with a new MYR19.90 TP (19x FY15F P/E, 8% upside), after tweaking  our  BV/earnings  forecasts.  Despite  positive  sentiment  from the  1-for-2  bonus  issue,  we  expect  lacklustre  earnings  growth  and lesser dividend payout given a tougher environment ahead.

FY14  in line.  LPI Capital’s (LPI)  MYR223m  FY14 core net profit  (+11% YoY)  met 100% of our and consensus estimates.  This excluded a lumpy MYR60m realised gain from a long-term equity investment  made in 4Q.Underwriting (UW)  margins in  general insurance (GI)  subsidiary Lonpac Insurance  surged  120bps  to  31.2%  (from  30%).  More  fire  insurance (38% of its portfolio) and sustained  overall  loss ratios  offset a lacklustre4% premium growth, an industry trend  on  competition and  a  tightening credit  cycle.  Claims  ratio  at  44%  (FY13:  45.5%)  implied  a  more diversified  risk  portfolio  and  expense  ratio  at  19%  (FY13:  18.2%)reflected  cost  controls.  UW  margins  for  fire  improved  to  80%  (FY13: 73%) as fire net claims ratio improved significantly to 14% (FY13: 21%).

1-for-2  bonus  issue  (BI)  and  flood  exposure.  The  BI  will  benefit shareholders  as  the  insurance  stock  was  highly  illiquid.  Lonpac  has  a combined 62% exposure to fire and motor premiums. Given LPI’s aboveindustry exposure to fire insurance, we estimate gross claims exposure to the East Coast floods at ~MYR20m.  Yet, we expect the net impact onearnings to be minor (2-3% of  FY15  earnings) as it is well-covered by reinsurance and claims provisioning.

Forecast  changes.  We  lower  our  FY15F/FY16F  EPS  by  8%/18%respectively  as  we  cut  revenue  growth  to  6%  and  expect  higher  loss ratios for FY16 on a tougher operating environment and more challenges post  fire and motor detariffication in 2016.  We decrease  our FY15/FY16 BV assumptions by 5%/6% respectively as we expect softer appreciation of Public Bank’s (PBK MK, NEUTRAL, TP: MYR20.60) share price – part of available-for-sale investments  –  while revising our dividend payout to 75%. LPI’s FY14 DPS at 75  sen  implies  a 75% payout on its core profit, below our earlier assumption of 80%.

Downgrade  to  NEUTRAL  (from  Buy),  with  a  lower  MYR19.90  TP(from  MYR20.70).  This  is  pegged  to  a  higher  19x  FY15F  P/E,  which implies 2.4x FY15F P/BV (vs 5-year average of 2.5x). While we like LPI’sprofitable  product  mix,  and  the  BI  could  spur  short-term  positive sentiment,  we  see  limited  upside  on  its  lacklustre  earnings  growth prospects and dividend payouts.

Source: RHB