"LPI Solid as a Rock" by OSK Investment Research Team
We met up with LPI’s management recently and came away from the meeting confident that the group will sustain its earnings momentum moving forward, driven by: (i) higher underwriting surplus mainly from its non-motor segments, (ii) lower claims ratio, and (iii) stronger agency force. Maintain BUY, with an unchanged FV of RM15.40, pegged to a 3-year PER of 19.4x.
Solid record. LPI’s FY11 results stood strong in spite of the challenging and competitive business environment. Management is targeting to grow its gross premiums by some 15%, boosted by: (i) new businesses from strategic partners which are also global insurers, (ii) strong growth from its construction-related business, supported by the rollout of more Economic Transformation Programme (ETP) projects, and (iii) stronger growth in its marine, aviation and transit business, which is generally profitable.
We understand that management intends to strengthen its agency force as it believes that it may be able to attract agents from other insurance companies given the prevailing uncertainties arising from M&As in the industry. MMIP likely to still see shortfall in FY12. The overall claims ratio in FY11 shot up to 48.9% from 47.7% y-o-y due to its share of losses incurred in relation to the Malaysian Motor Insurance Pool (MMIP). LPI’s share of MMIP losses in FY11 amounted to RM11.1m as MMIP had chalked up a cumulative shortfall over 7 quarters as at end-3Q11. We expect MMIP to continue to fall short of funds over the next two years, at an estimated RM2m–RM3m per quarter. Nonetheless, management is confident of keeping its claims ratio below 50% in tandem with its stringent underwriting practices.
Sustainable dividend payout expected. Generally seen as a dividend stock, management has guided that LPI would be able to maintain a 100% dividend payout ratio given its high capital adequacy ratio (CAR) that is well above the required 130% set by Bank Negara Malaysia. We are confident that this is possible in light of its stable cash flow outlook and net cash position.
Maintain BUY. We continue to like the group’s record in creating shareholder value by consistently delivering robust results and growth. That said, given its relatively high share price, we do not discount the possibility of the company declaring another bonus issue or share split to reward its shareholders as well as to enhance the stock’s liquidity.
