LPI Capital - 2Q12 earnings saw a turnaround

Period  2Q12/1H12

Actual vs. Expectations 1H12 PAT of RM71.9m was marginally below ours (37%) and the consensus expectations (34%). However, 2Q12 PAT of RM40.4m, +28.7% YoY and +28.3% QoQ rise was encouraging as we have guided in our preview note.

Dividends           First interim single tier dividend of 15 sen per share.

Key Result Highlights

On a QoQ basis, the group’s 2QFY12 PAT was up by 28.3% to RM40.4m. The increase was mainly driven by the normalisation of claims vs. 1Q12, which saw a high frequency of catastrophic losses.

In 2Q12, the total portfolio claims ratio normalised to 45% as compared to 1Q12’s 60%, which was within our full year forecast of 48%. Meanwhile, the fire division’s loss ratio improved to 14.6% (vs. 1Q12: 30.5%), motor division to 75.3% (vs. 1Q12: 79.6%), marine, aviation & transit to 13.5% (vs. 1Q12: 43.9%) and the miscellaneous division to 43.1% (vs. 1Q12: 69.0%).

During the quarter, LPI registered a 19.2% YoY growth rate in the gross written premium to RM268.5m, driven by the fire and marine divisions.

A relatively low expense ratio offered positive impacts in the 2Q12 as well. The expense-to-revenue ratio was lower at 10%, which was a slight better the management’s guidance and ours forecast of 12%.

Outlook

We believe LPI’s higher-than-industry organic growth is sustainable and its earnings have more room to grow. Its business cash generation remains the strongest in the sector with an expected RM195m in FY12.

In addition, the positive news is that PBBANK does not need to raise new capital anymore under the new Basel III capital requirement. This could make LPI a good dividend paymaster going forward. We estimate that this will free up a total of RM80-90m in capital over the next few years. We reckon that LPI could return this excess cash pile to shareholders. The deployment of surplus cash will also provide a lever to improve its ROE.

Nonetheless, we have only factored in a conservative payout ratio of 90% for FY12-FY14 in our model. Based on our estimates, LPI could potentially pay out RM0.79- RM1.21 in dividends per share for FY12-FY14, translating into net dividend yields of 6%-9%.

Change to Forecasts       Maintaining FY12-13E PAT of RM194.8m – RM237.2m.as we believe 2H12 contribution to bottom will be stronger.

Rating   OUTPERFORM

Our OUTPERFORM rating is maintained as the current share price implies a 24% total upside.

Valuation            Our OUTPERFORM rating is retained with a marginally higher TP of RM16.10 based on 15.0x FY13 PER, 2.2x BV and a 7.1% net yield as we roll forward our valuation year.

Risks      Unexpected catastrophic events could erode underwriting margin.

Source: Kenanga