LPI started FY15 with in-line profits, as UW margin surged by 510bps due to a profitable mix of fire insurance and high recognition of commission income. Move to TAKE PROFIT (from Neutral), with a lower MYR13.20 TP (19x FY16F P/E), 11% downside. While we like its quality products and management track record, its share price may have run ahead of valuations after the completion of its bonus issue.

Good start for FY15. LPI Capital’s (LPI) MYR57m 1QFY15 core net profit (+13% YoY) met 25% of our and consensus estimates.Underwriting (UW) margins in general insurance (GI) subsidiary Lonpac Inurance surged by 510bps YoY to 29.3% (from 24.2%), attributed to a greater mix of high-margin fire insurance (39% of its portfolio) and the commission income that far outweighed commission expenses. Total net claims ratio improved to 49.1% (1Q14: 50.8%) despite a surge in fire and motor claims ratios to 19% and 78% respectively. Expense ratio remained at 23%, dem onstrating cost control. LPI completed its 1-for-2 bonus issue. No dividends were announced as expected.

Outlook and forecast changes. The insurer is targeting to improve its topline growth to ~10% (from 5%), in tandem with the increase of its agency force and Public Bank’s (PBK MK, BUY, TP: MYR21.00) 9-10% loans growth target. However, we foresee heightening industry competition as sector premium growth is still highly correlated to a weak domestic economy growth (our in-house GDP growth is 5% vs real GDPgrowth of 6% last year). Our topline growth assumption of 6% remains conservative vs management’s target. We maintain our FY15F EPS, but increase FY16F/FY17F EPS by 6% following our adjustment of UW margins to 28% from 26%. We realised we were too cautious about the risks of LPI’s fire and motor insurance margins erosion from potential industry detariffication. W e now expect the detariffication to be gradual and partial as detailed in our Insurance: Defensive And Long-Term Quality Remains report dated 20 Mar.

TAKE PROFIT, TP adjusted to MYR13.20 (from ex-bonus MYR13.30)as we roll over to FY16 valuations (19x P/E) at an implied 2.2x FY16F P/BV. While we like its product mix, quality and managementtrack record, the current price (which surged 23% YTD partially on the bonus issue) has exceeded fair valuations, and the industry environment remains challenging. LPI is currently trading at 2.7x FY15F P/BV vs a 5-year 2.5x average. As we expected, 75% of LPI’s profits will be paid out as dividends (vs 80-100% historically). W e highlight that its BV is primarily correlated to the appreciation of Public Bank – part of availablefor-sale investments. We advocate accumulation at lower levels.