LPI Capital - Propositions Intact

Date: 
2024-02-27
Firm: 
KENANGA
Stock: 
Price Target: 
14.70
Price Call: 
BUY
Last Price: 
12.08
Upside/Downside: 
+2.62 (21.69%)

LPI’s FY23 results were within expectations. LPI could continue to hold its position in the market thanks to the backing of a leading financial institution, and with more infrastructure projects likely to fuel its miscellaneous segments. We opine dividend returns of 6% may not be too farfetched for the group, likely to win favours with yield seekers. Maintain our TP of RM14.70 and OUTPERFORM call.

FY23 within expectations. LPI’s FY23 net profit of RM313.7m was within our full-year forecast and consensus full-year estimates, making up 103% each of both.

Effective 1 Jan 2023, the group applied the new MFRS 17-Insurance Contracts standard to replace MFRS 4 which uniformly distributes revenue recognition of insurance and reinsurance contracts but also changes accounting presentations, such as the removal of “net earned premiums” for “insurance service result”.

YoY, FY23 insurance service revenue rose by 16% from stronger fire class insurance (+25%) whilst being supported moderately by the other segments. However, insurance service results only increased by 3% owing to a lower retention ratio of 63.9% (-9.4ppt) likely due to higher cession and excess of losses to reinsurers. Meanwhile, better investment performances (+23%) helped to uplift pretax profits and brought FY23 net income to RM313.7m (+24%).

QoQ, 4QFY23 revenue was flattish as fire class insurance tapered down slightly but was cushioned by growth from other segments. Similarly, insurance service results were dampened by lower retention ratios. In addition to comparatively lower investment income, 4QFY23 net profit of RM78.6m was 19% softer.

Outlook. Despite heightened competition resulting from the recent detariffication in the fire class insurance market, LPI managed to sustain its market share with the support of its affiliates. The group is wellpositioned to benefit from broader economic expansion, attracting more projects to its miscellaneous segment. Although the claims ratio might see a decline as overall activities normalize, there is an anticipation of an increase in reinsurance premiums due to past of flooding incidents which may stir continuous evaluation and adjustment of LPI's reinsurance coverage.

Forecast. Post results, our FY24F earnings are relatively unchanged. Meanwhile, we introduce our FY25F numbers.

Maintain OUTPERFORM with TP of RM14.70. We recalibrate our valuation benchmarking for the insurers within our coverage following their full-year reporting under MFRS 17.

Against the industry average PBV of 2.1x, we attach a 25% premium to LPI at FY24F BVPS at 2.6x (from 2.5x) on the back of: (i) better net margins of 17% (vs peer’s 1`%), and (ii) higher dividend returns of 6%- 7% (vs peer’s 4%-5%). LPI’s premium valuation may also be supported by its long-term viability from its affiliation with Public Bank. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) lower premium underwritten, (ii) higherthan-expected claims, and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 27 Feb 2024

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