LPI (FV RM15.40 - BUY) Company Update: Solid as a Rock

Stock Name: LPI
Company Name: LPI CAPITAL BHD

Research House: CIMB

Price Call: BUY

Target Price: 15.40

We met up with LPI's management recently and came away fromthe  meeting confident that the groupwill sustain its earnings momentum moving forward, driven by: (i) higherunderwriting surplus mainly from its non-motor segments, (ii) lower claimsratio, and (iii) stronger agency force. Maintain BUY, with an unchanged FV ofRM15.40, pegged to a 3-year PER of 19.4x.

Solid record.  LPI's FY11 results stood strong in spite ofthe challenging and competitive business environment. Management is targetingto grow its gross premiums by some 15%, boosted by: (i) new businesses from strategic partners which are also globalinsurers, (ii) strong growth from its construction-related business, supportedby the rollout of more Economic Transformation Programme (ETP) projects, and(iii) stronger growth in its marine, aviation and transit business, which isgenerally profitable. We understand that management intends to strengthen itsagency force as it believes that it may be able to attract agents from otherinsurance companies given the prevailing uncertainties arising from M&As inthe industry.

MMIP likely to stillsee shortfall in FY12. The overall claims ratio in FY11 shot up to 48.9%from 47.7% y-o-y due to its share of losses incurred in relation to theMalaysian Motor Insurance Pool (MMIP). LPI's share of MMIP losses in FY11amounted to RM11.1m as MMIP  had chalkedup a  cumulative shortfall over  7 quarters as at  end-3Q11. We expect MMIP tocontinue to fall short of funds over the next two years, at an estimatedRM2m'RM3m per quarter. Nonetheless, management is confident of keeping itsclaims ratio below 50% in tandem with its stringent underwriting practices.

Sustainable dividendpayout expected.  Generally seen as adividend stock, management  has  guided that LPI would  be able to maintain a100% dividend payout ratio given its high capital adequacy ratio (CAR)  that is well above the required 130% set byBank Negara Malaysia. We are confident that this is possible in light of itsstable cash flow outlook and net cash position.

Maintain BUY. Wecontinue to like the group's record in creating shareholder value by consistently  delivering robust results and growth.  That said, given  its relatively  high share price, we do not discount thepossibility of the company declaring another bonus issue or share split toreward its shareholders as well as to enhance the stock's liquidity. MaintainBUY, with an unchanged FV of RM15.40, based on its 3-year PER band of 19.4x.

Source: OSK188