LPI Capital’s (LPI) 1QFY12
revenue were within our expectations at 23.6% of our estimates but its
earnings accounted for only 17.9% of our numbers, largely due to higher claims
incurred and lower investment income. Net profit shrank 19.8% qo-q and 18.4%
y-o-y although gross written premium grew 51.0% q-o-q and 17.3% y-o-y. The
group’s claims ratio rose to 60.1% from
50.5% in the previous quarter. We are keeping our earnings forecast for now and
will monitor LPI’s claims ratio closely to ensure that its profitability rises
in tandem with premium growth. Maintain BUY.
Impressive revenue
growth but higher claims
eroded earnings. LPI recorded an impressive growth in gross
written contribution (+51.0% q-o-q, +17.3% y-o-y) but net income contracted
19.8% q-o-q and 18.4% y-o-y due to the high frequency of catastrophic losses,
and an
unprecedented increase in the number of fire and motor claims. The
group’s claims ratio jumped to 60.1%
from 50.5% in the previous
quarter while its management expenses ratio rose to
21.7% from 16.3% in the prior quarter. Meanwhile, its investment income
shrank 6.4% y-o-y while revenue from its investment holding segment dropped
from RM19.4m to RM16.0m compared
with that in the previous
corresponding quarter on a lower dividend income.
Asset quality intact.
Despite the unusually high frequency of fire and motor claims in 1QFY12, the
group’s Capital Adequacy Ratio (CAR)
remained well above the minimum regulatory requirement of 130%. LPI also
highlighted that its focus on growth will remain resolutely on traditional
products and preferred risks, and that its realigned underwriting standards and
risk selection will enable it to improve its combined ratio moving forward.
Earnings downgrade
watch. We note that the group has not factored in any expected losses from
the Malaysian Motor Insurance Pool (MMIP) as it has not received the P/L from
MMIP as yet. Nonetheless, we are maintaining our earnings projection for now
and will monitor its claims ratio closely as we remain confident that the group
would be able to grow its premiums. We think that its tie-ups with strategic
business partners which are also global insurers, coupled with its
improved market recognition, contributed to the impressive gross written contribution
growth in the quarter.
Maintain BUY. We
are maintaining our earnings forecast for now as we remain positive that the
group would be able to grow its premium
income. That said, we are also keeping a close eye on LPI’s claims ratio to ensure that its profitability
is on track with our projections. Maintain BUY, with an unchanged fair value
(FV) of RM15.40, based on a 3-year PE band of 19.4x over FY12 EPS.
Source: OSK188
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