Robust dividends from LPI – surprisingly – but is this sustainable?

BELLWETHER insurance stock LPI Capital Bhd has come out pretty much unscathed so to speak from a year of pandemic turbulence by posting a modest 4.4% gain in net profit for its FY2020.

For its feat, the general insurer whose biggest shareholder is Public Bank Bhd founder Tan Sri Teh Hong Piow via Consolidated Teh Holdings Sdn Bhd (42.7%), doled out a second interim dividend of 44 sen for a total of 72 sen (FY2019: 70 sen).

The 72 sen dividend or an 85% payout ratio exceeds Kenanga Research’s expectation of 65 sen.

For its FY2020, LPI posted a net profit of RM336.73 mil (FY2019: RM322.36 mil) on the back of a slight rise in revenue to RM1.621 bil (FY2019: RM1.602 bil). This is achievable on the back of lower claims (-6%) as gross earned premiums moderated (+2% vs FY2019: +6%).

But the road ahead could be bumpy for LPI amid continued risks of prolonged lockdowns coupled with liberalisation of the motor and fire tariffs in June.

“We believe 1H FY2021 will still be robust as long as the economy remains open, abetted by lower claims incurred in a partial lockdown,” projected Kenanga Research analyst Ahmad Ramzani Ramli.

“We expect the motor segment to remain robust at least for 1H 2021 given the extension of the vehicle sales tax exemption with the miscellaneous and marine, aviation & transit (MAT) segments supporting growth in tandem with the expected economic recovery.”

All-in, Kenanga Research maintained its “outperform” rating on LPI but lowered its target price to RM15.10 (from RM15.35 previously) in tandem with LPI’s book value of equity per share (BVPS) to support its large dividend payout amid a challenging landscape for the insurance industry.

“We do not see lofty return on equity (ROE) ahead (five-year mean at 18%) which are expected to maintain at circa 16% with the incoming liberalisation of the insurance industry,” opined the research house.

“Given its RM1.7 bil reserves, we believe LPI will continue to target an 85% payout ratio offering >5% dividend yield.”

At current price level, this could appeal to yield-seeking investors even if the group lowers the payout to its 5-year average of c.76%, added Kenanga Research.

Risks to the research house’s call include (i) lower premium underwritten; (ii) higher-than-expected claims; (iii) higher-than-expected management expense ratio; and (iv) further rounds of MCO.

At 11.25am, LPI was up 24 sen or 1.78% to RM13.70 with 214,500 shares traded, thus valuing the company at RM5.46 bil. – Feb 4, 2021

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