LPI Capital - Recovering From 1QFY12 Bashing

LPI Capital’s 1HFY12 annualized earnings accounted for only 40.9% of our full-year forecast due to higher-than-expected claims in 1QFY12. Despite its impressive revenue growth, we believe that its 2HFY12 claims ratio would not exceed our estimate. Hence, we are trimming our earnings forecast by 5.2% for FY12 and 4.4% for FY13 on assumption of a higher claims ratio of 49.0% for both years. Maintain BUY, with a higher fair value (FV) of RM15.60, as we roll over our valuations from 19.4x FY12 EPS to 19.4x on its 12-month forward earnings.

Gross written premiums jump 18.2% y-o-y. LPI Capital’s total gross written premiums jumped 18.2% y-o-y but net income was up by a marginal 2.7%. The group’s annualized earnings accounted for only 40.9% of our full-year estimates, no thanks to higher-than-expected claims in 1QFY12 (YTD FY12: 52.3% vs YTD FY11: 48.7%). Total investment income shrank 2.4% y-o-y due to lower dividend income while management expenses dropped to 17.4% from 21.7% in the preceding quarter.

Asset quality intact. The substantial improvement on the group’s performance is a reflection of its prudent risk management policy. Its claim ratio stood at 45.0% in 2QFY12 compared with 60.1% in 1QFY12, while its capital adequacy ratio (CAR) remained well above the minimum regulatory requirement of 130.0%.

Downgrading FY12 and FY13 earnings forecasts. Despite the impressive revenue growth, we believe that LPI’s claims ratio in 2HFY12 would not exceed our projection. Thus we are reducing our earnings forecasts by 5.2% for FY12 and 4.4% for FY13 on the back of a higher claims ratio assumption of 49.0% for both financial years. We believe that our earnings revision is justified since the group has not factored in any losses from the Malaysian Motor Insurance Pool (MMIP), as well as anticipation of weaker than expected earnings in 1QFY12.

Maintain BUY, revised FV of RM15.60. The group has declared an interim dividend of 15 sen per share, which comprises 27% of our full-year dividend forecast. Despite tweaking lower our earnings projections, our revision actually leads to a slightly higher FV of RM15.60 compared with RM15.40 previously, as we roll over our valuation from  19.4x FY12 EPS to 19.4x on the stock’s 12-month forward earnings (50% FY12 EPS and 50% FY13 EPS). Our valuations are justifiable as the group has been consistently chalking up earnings growth and paying dividends to its shareholders.

Source: OSK