News

Last Tuesday, LPI announced the disposal of another 2.5m PBBANK shares (0.06% of PBBANK issued shares ex. treasury shares) leaving its PBBANK shareholding at 1.35%.

Comments

This represents the 5th sale of PBBANK shares (first being in 4Q14). So far for FY15, LPI have disposed off 5m PBBANK ordinary shares with a total gain of RM70.5m.

According to the announcement, this disposal will result in FY15 EPS higher by 11.2 sen from the approximate RM37.1m gain. The gain, however, is non-recurring and would not impact core FY15 EPS.

The announcement also stated that the rationale for the disposal is to realise tax-exempt capital gains and to support business growth. The sale proceeds will be used to pay cash dividend to LPI's shareholders in first quarter of 2016 and the balance will be placed into fixed deposit to generate interest income.

Outlook

The move appears rational on the back of the less exciting prospects of the insurance sector where the challenging economy will dampen the growth of insurance industry moving forward. Industry growth is expected to grow between 3-4% for 2015 as forecasted by the General Insurance Association of Malaysia.

Having said that, FY15 net profit will register growth albeit lower at 7.2% (we had forecasted a negative growth for FY15 previously) considering the high FY14 base following the larger sale of PBBANK shares in 4Q14 which provided a higher gain of RM59.9m.

As the disposal will not adversely impact its core earnings, there is no change in our core FY15/16E net profits growth which we maintained at +4.4/+4.7 for FY15/16E.

The disposal will likely result in LPI maintaining its FY15 DPS of 75.0 sen per share (FY14: 75 sen/share). We had assumed it to be at 60.0 sen/share previously. We thus raised our forecast DPS for FY15/16E to 75.0 sen implying a dividend payout of 82%. FY14 dividend payout was at 58% but this is due to the lower number of ordinary shares at 220.5m before the Bonus Issue of 110.7m. For FY16, we maintained DPS of 60.0 sen/share (implying dividend payout of 81%) as subdued earnings will restrict dividends declared.

Change to Forecasts

No change in our core earnings estimates as any potential incremental income from the disposal is expected to be minimal.

Rating

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While LPI is still proving resilient amidst a challenging economic environment, growth is expected to be subdued moving forward.

However, given that LPI consistently strives to boost earnings by capital gains, we do not discount further disposal of PBBANK shares to enhance dividends for FY16.

Valuation

Target price unchanged at RM13.35, based on a blended FY16E price-book (PB)/price-earning (PE) ratio of 2.4/19.1x (previously it was FY16E PB/PE ratio of 2.5/21.2x. The lower valuation is reflective of the lower ROE going forward.

Risks

Lower premium underwritten, hence growth.

Higher-than-expected combined ratio as well as effective tax rate.

Source: Kenanga Research - 30 Dec 2015