PETALING JAYA: Despite the tough operating environment, LPI Capital Bhd’s earnings growth is expected to remain resilient through 2019, driven by its fire insurance products.
The general insurer saw its share price jump as much as 18 sen, or 1.1%, to hit RM16.24 during intra-day trade yesterday after having declared a dividend of 27 sen per share a day earlier on the back of strong profit growth for the second quarter ended June 30, 2019.
LPI’s shares closed 12 sen higher at RM16.18 yesterday. Year-to-date, the counter has gained about 2.9%.
Reiterating its “buy” recommendation on LPI, Affin Hwang Capital Research maintained its target price for the counter at RM18.90 based on 3.14 times the company’s estimated price-to-book-value ratio for 2020.
The brokerage said its key assumptions for LPI included a gross written premium (GWP) growth at 3%-5%; net earned premium growth at 5%-5.6%; and net claims ratio at 38%-39%.
“Based on LPI’s track record, its core net profit has not seen a decline since 2001,” Affin said.
“We understand that though the entire general insurance industry’s GWP declined by 7.6% year-on-year (y-o-y) in the first quarter of 2019, LPI, on the other hand, saw a growth of 5.1% yoy to RM827.5mil for the first half of the year due to its strong distribution channel and global partnership,” it added.
According to MIDF, while LPI’s earnings momentum remained resilient, it remained cautiously optimistic of the latter’s growth prospects, given the escalating competition in the general insurance segment due to the motor and fire liberalisation exercise.
“Note that LPI’s fire and motor insurance accounts for about 65.0% of total GWP, whereby fire alone contributes approximately 64% of total underwriting surplus before management expenses. Thus, the allowable deviation of up to 30.0% for the pricing of new fire products and potentially further fire liberalisation would likely take its toll on LPI’s earnings moving forward,” MIDF said.
“The possible further deterioration in claims ratio amid price war might cause the group’s combined ratio to worsen,” it added.
Nonetheless, MIDF said, the resumption of some government infrastructure works and improved domestic economic conditions, coupled with the group’s prudent underwriting practices, would partially supporting it to weather the structural change in the industry.
MIDF maintained its “neutral” stance on LPI with an unchanged target price of RM16.20 based on 18.65 times the estimated earnings for 2020.
Meanwhile, Kenanga Research said the sentiment for LPI’s shares could be steered by the solid backing from a sizeable financial institution (that is, PUBLIC BANK BHD) which may provide comfort on the sustainability of the group’s operations.
In addition, dividend returns of 4.5% and 4.6% for 2019 and 2020, respectively, could be decent enough for investors as well.
Kenanga Research maintained its “market perform” rating for LPI, with an unchanged target price of RM16.50 based on 19 times forward earnings and three times PBV for 2020.
LPI on Monday announced a net-profit growth of 7.8% y-o-y to RM70.78mil in the second quarter of 2019 on improved contributions from the group’s subsidiary Lonpac Insurance Bhd.
Group revenue for the quarter under review rose 9.6% y-o-y to RM353mil, and it declared a first interim dividend of 27 sen a share, higher than the 26 sen a share paid for the previous comparative quarter.