This article first appeared in The Edge Financial Daily, on October 12, 2015.

LPI Capital Bhd
(Oct 9, RM14.50)
Downgrade to underperform with a lower target price of RM13.35: LPI Capital Bhd’s (LPI) cumulative nine months of financial year 2015 (9MFY15) net profit came in at RM218.8 million due to strong growth from net earned premiums and other income.

Stripping out the realised gain from Public Bank Bhd’s share sales, core net profit came in at RM185.5 million, accounting for 80% of our and market estimates.

Other contributing factors were a strong performance from investment income, which grew 10.3%, and commission income jumped 16.1% for the nine-month period.

However, the expansion in net profit was capped by a higher management expenses ratio, despite a lower net commission ratio and lower claims ratio.

Consequently, the combined ratio decreased only by one percentage point (ppt) to 69.4%.

On a quarter-on-quarter (q-o-q) basis, third quarter financial year 2015 (3QFY15) earnings fell by 11% due to a 31% fall in other income albeit net earned premiums growing by 5.7%.

On the upside, claims ratio fell by 5.26ppts; management expenses ratio dropped by 3.5ppts, but net commission ratio jumped 70ppts.

The challenging economy will dampen growth of the insurance industry moving forward. Industry growth is expected to grow between 3% and 4% for this year as forecast by the General Insurance Association of Malaysia.

We make no changes to our earnings estimates, and we maintain our earnings forecast for FY15, due to the resilient performance of the group up to 9MFY15.

For FY16, we maintain our earnings as we forecast net earned premium growth of 3.8% versus 7.6% for FY15.

While LPI is still proving resilient amid a challenging economic environment, growth is expected to be subdued moving forward. — Kenanga Research, Oct 9.