LPI Capital Bhd
(Feb 4, RM15.06)
Maintain hold with a lower fair value (FV) of RM15.30:Our “hold” call on LPI Capital Bhd is kept. Our FV is revised to RM15.30 from RM16.40 a share as our financial year ending Dec 31, 2020 (FY20) book value per share estimate is lowered after factoring in the actual shareholders’ equity for FY19.
The group’s FY19 shareholders’ equity was lower due to a drop in FV reserves, contributed by marked-to-market losses on equities (FV through Other Comprehensive Income securities) of RM232.9 million. We believe these are Public Bank shares held by LPI.
Our valuation is supported by a return on equity of 15.8% leading to a price-to-book value of 2.9 times. Our FY20 and FY21 net profit forecasts for LPI are fine-tuned by 7.8% and 7.6% respectively after adjusting estimates for commission expenses and raising the projection for taxes.
LPI core net profit for the fourth quarter ended Dec 31, 2019 was marginally lower at RM87 million or 1.4% quarter-on-quarter attributed to higher tax expenses. Its core earnings for FY19 were at RM322 million or +2.6% year-on-year (y-o-y) underpinned by a stronger net earned premium (NEP), partially offset by higher net claims, commission and management expenses.
Its cumulative earnings were in line with our expectation — 99.6% of our estimate and 99.7% of consensus’ projection.
LPI’s gross written premium (GWP) in FY19 grew a modest 3.7% y-o-y contributed largely by motor and marine, aviation and transit premiums. Growth in GWP for fire insurance was tepid at 1.3% y-o-y. Nevertheless, its NEP rose 8.7% y-o-y as the group ceded a lower portion of the fire and motor premiums to reinsurers, resulting in its retention ratio climbing to 67.6% in FY19 versus 65.8% in FY18.
The fire and motor insurance liberalisation has resulted in a competitive pricing for premiums for the general insurance industry. The group was not spared from this and its underwriting margins slipped to 29.6% in FY19 versus 32.1% in FY18.
LPI’s claims ratio rose to 43.9% in FY19 compared with 40.9% in FY18, attributed to rising claims from the marine, aviation and transit and miscellaneous segments, particularly, the health and medical class of insurance. Its claims ratio for motor insurance remained elevated at 72.4% in FY19 versus 73.4% in FY18.
Its management expense ratio was stable at 19.1%. LPI’s commission ratio rose slightly to 6.8% in FY19 largely due to higher commission expenses. Its combined ratio for FY19 increased slightly to 69.8% from FY18’s 67.3%, and was marginally lower than our estimate of 71.5%. — AmInvestment Bank, Feb 4