LPI Capital - OUTPERFORM - 04 JULY 2012

LPI’s 2Q12 earnings are expected to see a turnaround, largely driven by the normalization of its claim ratio while seeing a slight increase in unearned premium reserve (IBNR) as premiums continue to grow strongly.  We continue to see a bright prospect for the group and are maintaining our earnings estimates despite 1H12 likely to be marginally below expectations. Our OUTPERFORM rating is retained with an unchanged TP of RM15.80 based on 18.0x PER, 2.6x BV and a 5.9% net yield. We believe that LPI’s outlook continues to look attractive vs. its  Malaysian financial peers supported by its potential earnings growth of a CAGR of 21% for FY10-14.  Its strong cash flow also supports an attractive dividend payout.  

LPI is due to report its 2Q12 results on the 9 July.  We are forecasting a profit after tax of RM40m, upped 27%  from RM31.5m in 1Q12.  The increase would likely be mainly driven by the normalisation of claims vs. 1Q12 (which saw a high frequency of catastrophic losses) and partly offset by a higher IBNR. We believe the total portfolio claims ratio should normalise to 50% as compared to 1Q12’s 60.1%. Meanwhile, the fire division’s loss ratio should come down to 20% (from 1Q12: 30.5%), the miscellaneous division (personal accident and health) to 50% (vs. 1Q12: 69%) and a flat motor claims performance at 80% (1Q12: 79%).  

We estimate gross premium to reach RM246m in 2Q12, +15%YoY and flat QoQ, to be driven by the miscellaneous division. As such, 2Q12 should see a slight increase in IBNR. We have assumed a lower investment income in 2Q12 as Public Bank Berhad (“PBBANK”) is not likely to pay any interim dividends during the quarter. The group owns a total of 55m PBBANK shares. We are estimating a flat 12% expense-to-revenue ratio, which is in line with management’s guidance.

In summary, 1H12 net profit of RM71.5m should likely be marginally below the consensus and our numbers due mainly to the earlier weak 1Q12. We are not changing our earning  estimates as we expect a stronger 2H2012 result performance. We believe the earnings prospect for LPI for the remainder of the year remains robust.

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

A compelling dividend play story. Apart from the strong uplift in the cash pile, 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, especially since it has no acquisition growth plan in place in the short-term. 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. Nonetheless, we only factor in a conservative payout ratio of 90% for FY12-FY14 in our model. We reckon that our prudent dividend payout ratio assumption is achievable as the payout ratio in FY11 already surpassed 100%. 

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%. In addition, the deployment of surplus cash  will also provide a lever to improve its ROE.

Source: Kenanga