We believe that LPI’s outlook continues to look attractive
vs. its Malaysian financial peers. The evidence of its strong prospect is illustrated
by its potential earnings growth of a 21% CAGR for FY10-14. Its strong cash flow also supports attractive dividend payouts. We
are maintaining our dividend estimates and believe that LPI is on track to pay
a 5.1%-6.7% dividend yield over the next two years while retaining its strong
group capital surplus. The stock is a
huge laggard within the financial sector and thus is likely to play a catch-up
to its sister company, Public
Bank Berhad (“PBBANK”) in our
view. We are maintaining our OUTPERFORM call with an unchanged TP of RM16.10
based on 15x PER, 2.26x BV and 6.7% net yield. The current share price implies
a 24% total upside to our target price.
A huge laggard
despite its strong fundamentals. LPI’s share price has risen only
1.1% YTD compared
to its sister company, PBBANK
(+17.3% YTD), which has performed much better. We attribute LPI’s share price under-performance
to the uncertainty over its dividends and fears of disappointing profits
following its weak 1QFY12. However, we understand that its earnings have
rebounded thereafter. Not only has LPI’s share price performance lagged that of
PBBANK substantially, the stock is also currently trading at the lowest point
of its historical PER band as well as its P/BV band. Its 12.9x FY13 PER is also at a 20% discount
to its 16.1x historical average and at a -1SD to its historical average P/BV
band of 2.3x.
Fundamentals intact.
We believe that its weak share price performance will reverse soon over the
next 6-12 months. LPI has clearly demonstrated a track record of delivering
quality growth consistently above market expectations year after year since its listing. This impressive track record has
given us a strong confidence belief in the existing management team led by Mr
Tee Choon Yeow, Group CEO. In our view,
LPI has the ability to generate new business growth over and above its premium
sales level of RM1.0b in 2012. We like the company’s high-quality growth
drivers of margin expansion, productivity gain and strong cash generation.
These were proven once
again in its
recent strong turnaround
in the 2Q
and its recent 3Q12 result.
A compelling dividend
play story. Apart from the strong
rise in its cash pile with its
earnings, the positive
news is that
PBBANK also 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 plan in place in the short term. We
estimate that this will free up a total of RM80-90m in surplus capital over the next few years.
Paying for protection. The valuation on defensive stocks is on the
rise again over the last couple of weeks and some of them have been hitting historical
highs. We think that recent macro data have turned weaker globally, putting at
risk earnings estimates. The resulting market volatility has been favouring
defensive stocks. Our analysis shows that stocks with a high dividend yield,
earnings certainty and positive earnings revisions have outperformed the rest.
Relative to other defensive stocks, LPI is still trading at a substantial
discount. As such, rising demand for defensive stocks should see a catch-up
play soon for LPI especially given its rising dividends, better free cash flow
generation, consistent ROE and high earnings certainty. This is likely to make
LPI a favourite among investors in the period ahead, in our view.
Key Points
A huge laggard among
Malaysian financial institutions. It
is not often that we can refer to LPI as a “cheap” financial institution in
Malaysia. LPI’s share price performance has substantially lagged that of PBBANK
for the first time in the last 3 years with the stock now trading at just 12.9x
PER, its lowest valuation point since 2009.
LPI’s share price has risen only by 1.1% YTD while PBBANK (+17.7% YTD)
and Maybank (+5.7%) have performed much better. As such, LPI’s PER (FY13 PER of
12.9x) is now at a 20% discount to its historical average PER of 16.1x and at a
-1SD its historical average P/BV band of 2.3x. Historically, ever since the
group embarked on its capital management programme and started offering
generous dividend yields in 2005, LPI has been outperforming PBBANK every
year. However, since its weak 1Q12
result, growing concerns over LPI’s ability to sustain a high leverage and
dividend payout as well as worries over its profits have weighed down share
price performance. Consequently, the group’s price outperformance has reversed
to being a laggard for this year.
A compelling dividend
play story. That said, its business cash generation remains the strongest
in the sector with an expected RM170m in FY12. Apart from the strong rise in
its 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 surplus
capital over the
next few years.
We reckon that LPI could return this excess cash to
shareholders. Nonetheless, we have only factored 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 RM0.69-RM0.94 in
dividends per share for FY12-FY14, translating into net dividend yields of
5.1%-7.0%. In addition, the deployment of surplus cash will also provide a
lever to improve its ROE.
Fundamentals intact. Judging from our recent conversation with
management, we believe that the group’s fundamentals remain intact. The key
highlights of the discussion are highlighted below. LPI’s higher-than-industry organic growth is seen
as sustainable. Its gross premium portfolio is likely to reach beyond RM1.0b
and together with the lag between its higher premium growth and profit, its
earnings are likely to grow in 2013 despite the challenging environment. In
3Q12, on a YTD basis, the key positive was its solid gross premium growth. LPI
registered a 17.1% YoY growth rate in its gross written premium to RM715.5m, driven
by the fire and marine divisions. This
was above the 7% industry growth rate and should rise
to 18% YoY
by year-end.
The total portfolio claims ratio was stable at 45.9% as
compared to 2Q12’s 45% and was substantially lower than 1Q12’s 60%.
The ratio was within
our full-year forecast of 48%.
Meanwhile, the fire division’s loss ratio improved to 14.9% (vs. 2Q12:
14.6%), the motor division to 75.1% (vs. 2Q12: 75.3%), the miscellaneous
division to 45.0% (vs. 2Q12: 43.1%) and the marine, aviation and transit
division to 19.4% (vs. 2Q12: 13.1%). The relatively low expense ratio seen in
3Q12 was encouraging, which was also within management’s guidance and our
forecast of 12%. This impressive track record has given us a strong confidence
belief in the existing management team led by Mr. Tee Choon Yeow, Group CEO,
that it will continue to grow the company successfully. We continue to like the company’s
high-quality growth drivers of margin expansion, productivity gain and strong
cash generation.
Source: Kenanga
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