LPI Capital Bhd (Jan 26, RM13.38)
Upgrade to market perform at RM13.40 with fair value of RM13.60: For FY12, LPI’s management expects gross premiums to grow by 15% to 16%, in line with our assumptions
and below the circa 20% achieved in FY11. In FY11, LPI’s “miscellaneous” classes grew strongly due to the newly introduced mandatory foreign worker insurance, although we
understand this has tapered off in FY12.
Management expects strong growth arising from its construction-related business, such as workers compensation and so on, due to the rollout of more Economic Transformation
Programme projects. LPI also expects strong growth in its marine, aviation and transit (MAT) segment, which it expects will make a larger contribution to LPI’s overall gross premiums portfolio in FY12 of about 5% to 6% (from about 4% currently).
We understand management expects a lower claims ratio for FY12, positively impacted by the increase in its MAT portfolio coupled with economies of scale as it continues to grow its gross premiums.
MAT businesses are generally profitable, although management noted that it is a class of business that LPI has to be careful of writing given the lumpy claims associated with the business. LPI expects its claims ratio for FY12 to be within the range of 46% to 47%, an improvement of two to three percentage points over FY11’s 48.9%.
In FY11, LPI paid out a total of 75 sen per share in dividends, which implies a net payout of 107%. Historically, LPI’s net dividend payout has ranged between 74% and 85%.
Dividends are largely dependent on LPI’s internal capital adequacy ratio (ICAR), which is set by Bank Negara Malaysia. We understand BNM has no issues with LPI’s ICAR, and as such, we believe there is a high likelihood of 100% dividend payout for FY12 onwards.
Risks to our view include:
(i) a change in government policy that may result in lower car prices;
(ii) jump in claims ratio;
(iii) its combined ratio may exceed 100%; and
(iv) intense competition from insurance sector liberalisation.
Our FY12 to FY14 earnings forecasts were increased by 0.5% to 2.4% after reducing our claims ratio for FY12 to FY14 and imputing the losses from the Malaysia Motor Insurance Pool.
LPI’s consistent dividend payouts and attractive yields of 5.7% to 7% per year are supported by its stable cash flow outlook and current net cash position. We believe this will support the share price at current levels, implying a FY12 price-earnings ratio of around 16 times and fair value of RM13.60, based on our upgraded earnings estimates.
We note that a dividend payout of 100%, higher than our 90% payout assumption, would result in further upside to the share price. As such, we expect continued interest in
LPI’s stock, although given its tight trading liquidity, we believe LPI is more suited to investors with long-term investment horizons. We therefore upgrade our call on the stock to “market perform” (from “underperform”). — RHB Research, Jan 26
Upgrade to market perform at RM13.40 with fair value of RM13.60: For FY12, LPI’s management expects gross premiums to grow by 15% to 16%, in line with our assumptions
and below the circa 20% achieved in FY11. In FY11, LPI’s “miscellaneous” classes grew strongly due to the newly introduced mandatory foreign worker insurance, although we
understand this has tapered off in FY12.
Management expects strong growth arising from its construction-related business, such as workers compensation and so on, due to the rollout of more Economic Transformation
Programme projects. LPI also expects strong growth in its marine, aviation and transit (MAT) segment, which it expects will make a larger contribution to LPI’s overall gross premiums portfolio in FY12 of about 5% to 6% (from about 4% currently).
We understand management expects a lower claims ratio for FY12, positively impacted by the increase in its MAT portfolio coupled with economies of scale as it continues to grow its gross premiums.
MAT businesses are generally profitable, although management noted that it is a class of business that LPI has to be careful of writing given the lumpy claims associated with the business. LPI expects its claims ratio for FY12 to be within the range of 46% to 47%, an improvement of two to three percentage points over FY11’s 48.9%.
In FY11, LPI paid out a total of 75 sen per share in dividends, which implies a net payout of 107%. Historically, LPI’s net dividend payout has ranged between 74% and 85%.
Dividends are largely dependent on LPI’s internal capital adequacy ratio (ICAR), which is set by Bank Negara Malaysia. We understand BNM has no issues with LPI’s ICAR, and as such, we believe there is a high likelihood of 100% dividend payout for FY12 onwards.
Risks to our view include:
(i) a change in government policy that may result in lower car prices;
(ii) jump in claims ratio;
(iii) its combined ratio may exceed 100%; and
(iv) intense competition from insurance sector liberalisation.
Our FY12 to FY14 earnings forecasts were increased by 0.5% to 2.4% after reducing our claims ratio for FY12 to FY14 and imputing the losses from the Malaysia Motor Insurance Pool.
LPI’s consistent dividend payouts and attractive yields of 5.7% to 7% per year are supported by its stable cash flow outlook and current net cash position. We believe this will support the share price at current levels, implying a FY12 price-earnings ratio of around 16 times and fair value of RM13.60, based on our upgraded earnings estimates.
We note that a dividend payout of 100%, higher than our 90% payout assumption, would result in further upside to the share price. As such, we expect continued interest in
LPI’s stock, although given its tight trading liquidity, we believe LPI is more suited to investors with long-term investment horizons. We therefore upgrade our call on the stock to “market perform” (from “underperform”). — RHB Research, Jan 26
