LPI Capital Bhd had a 1Q20 net profit of RM77.9 mil (+1.0% yoy) while on a qoq basis, earnings declined 10%. This came within Affin Hwang’s expectations, though it fell below consensus.
The research firm expects weaker results in the coming quarters as economic activities were dampened by the movement control order (MCO) subsequent to the Covid-19 pandemic. LPI continues to face challenges in terms of weak industry demand, price competition and high claims ratio, especially in the motor segment.
In 1Q20, LPI’s improved underwriting profit (+14.8% yoy) was offset by weaker investment results and hence saw just a marginally better pretax profit yoy.
The research firm has maintained its sell recommendation for the company with an unchanged target price of RM9.50.
Top-line growth saw a gross written premium (GWP) expansion of 5.4% yoy (driven by a robust miscellaneous segment) while the net earned premium was relatively flat yoy due to a lower group retention ratio of 64.5% (1Q20) vs 65.8% in 1Q19 and 70% in 4Q19.
The group’s net claims ratio and combined ratio stood at 47.4% and 74.6% respectively as at 1Q20, and was relatively flat yoy. LPI managed to achieve better underwriting results in 1Q20 (+14.8% yoy) largely due to lower claims at the miscellaneous segment, though offset by higher motor claims.
Meanwhile, weaker investment results, due to unfavourable fair-value losses (RM8 mil), resulted in a relatively flat net profit yoy.
“Operating conditions remain challenging due to the Covid-19 pandemic. In our view, the general insurance industry is facing unprecedented challenges brought on by the pandemic and we expect 2020 to be a bleak year,” said Affin Hwang.
Though the newly gazetted conditional MCO allows for more businesses to reopen, the practice of social distancing and general cautiousness still prevails. In fact, nine states say they continue to maintain a strict MCO.
Affin Hwang has maintained its 2020- 22E earnings based on two assumptions: i) GWP growth at -7.0% for 2020E and flat for 2021E; and ii) net claims ratio at 43%. It foresees 2020E net profit to decline by 14.5% yoy and stay flat in 2021E.
LPI’s robust capital adequacy ratio (CAR) in excess of 400% reflects its strong underwriting capacity to take on more risks and withstand potential shocks.
Meanwhile, MIDF said LPI’s growth was mainly attributable to the exclusion of the fair value losses of about RM8 mil in the equity and bond markets which will remain volatile in coming months. Moving forward, it expects the group’s quarterly earnings to be subdued due to Covid-19, MCO and weakening business sentiments.
“In view of extended MCO and anticipated weakening business sentiments in 2QCY20, we are expecting the group’s net earned premium (NEP) to be negatively impacted. This was predominantly due to the group’s active exposure in the infrastructure space and we anticipate a delay in construction projects and property launches,” said MIDF.
While MIDF anticipates a premium contraction moving forward which would be putting pressure on the underwriting profit, the relatively low combined ratio as compared to the industry average (i.e. 93% in CY19) would provide ample room for the group to partially manoeuvre through this unfavourable business environments.
In view of the potential disruption to premium income and expected further liberalisation process and a rising claims environment, MIDF is revising downward its earnings forecasts by -15.8% and -16.7% for FY20 and FY21 to RM280.2 mil and RM290.2 mil respectively.
It is revising its TP to RM11.70 (previously RM15.50) as it rolls over its valuation to FY21. This is achieved via pegging its FY21 core EPS of 72.8sen to a lower PER of 16.1x (previously 18.6x). The revised PER represents the group’s -1SD discount to its 5-year historical average to take into account the subdued business environment arising from the Covid-19 outbreak.
It has maintained its neutral call on the company.
AmResearch, meanwhile, has maintained its hold recommendation on LPI with a revised fair value of RM13.60/share from RM15.30/share. This is based on a lower FY20 BV/share estimate. It has factored in higher fair value losses for FVTOCI securities (mainly Public Bank shares) which have reduced its projected shareholders’ funds for FY20. Its revised valuation is pegged to a P/BV of 2.8x supported by an ROE of 16.4%.
At 12.30 pm today, LPI Capital shares were traded at RM13.20, up 22 sen compared to yesterday’s close with a volume of 13,500 shares changing hands. – May 5, 2020
