LPI Capital Bhd
(July 9, RM16.80)
Maintain outperform at RM16.28 with fair value of RM19.23: LPI reported 1HFY12/10 net profit of RM64.8 million (+11.2% year-on-year), which was 42% of our and 44% of consensus full-year estimates.
However, we note that 2Q earnings have consistently been the weakest, mainly due to the lower investment income at group level as dividends from Public Bank were recognised in 1Q and 3Q.
The 2Q revenue grew 13.3% y-o-y on the back of higher gross premiums, while profit before tax (PBT) grew by 19.7% due to higher underwriting surplus.
Q-o-q revenue declined by 19.8% due to 1Q being seasonally stronger, while net profit declined by 31% as a result of a higher tax rate and lower investment income at group level (RM23.6 million against RM400,000). The underwriting surplus was better by 36.1% due to lower management expense and claims ratios.
LPI declared a single-tier interim net dividend of 10 sen for 2QFY12/10, which is low compared with the dividend in the same period last year of 26.25 sen.
As highlighted in our previous report, we expect LPI to undertake a corporate exercise to increase its share liquidity. LPI proposed a 1-for-2 bonus issue which would result in an issuance of up to 69.4 million new shares.
LPI also proposed a 1-for-10 rights issue at an issue price of RM7 which would further result in an issuance of up to 13.9 million new shares. The proceeds of up to RM95.3 million from the rights issue would be utilised for working capital.
Based on the proposals, we estimate that earnings per share (EPS) would be diluted by 4.7% for the rights issue. However, we are leaving our forecasts unchanged until the approval of the proposals, which we understand will be by the end of 3Q.
Risks include: (i) Change in government policy that may result in a lower fire premium; (ii) Jump in claims ratio; (iii) Combined ratio may exceed 100%; and (iv) Intense competition from insurance sector liberalisation.
We maintain our outperform call on the stock, with a new fair value of RM19.23 after rolling forward our valuation base year to FY11 (from FY10 previously) with an unchanged target price-earnings ratio (PER) of 15 times. — RHB Research, July 9
This article appeared in The Edge Financial Daily, July 12, 2010.
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