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LPI Capital

Recommendation: HOLD
Stock Code: 8621 Bloomberg: LPI MK Price: MYR16.28 12-Month Target Price: MYR17.00 Date: July 9, 2010

Board: Main Pr i ce 30 Day Movi ng Aver age Price (MYR)


17.00

Sector: Finance 16.00


15.00

GICS: Financials/Property & Casualty Insurance 14.00


13.00
Market Value - Total: MYR2,258.0 mln 12.00
11.00

Summary: LPI Capital (LPI) is a general insurer with 10.00


9.00
operations in Malaysia, Singapore and Cambodia. It 8.00
underwrites a comprehensive range of general insurance
classes, including fire, motor, marine, aviation and transit, Vol ume Vol ('000)
400
personal accident, medical, construction, engineering and 300
liability. 200
100
Analyst: Samuel Seah 0
Jul 07 Sep 07 Nov 07 Jan 08 Apr 08 Jun 08 Aug 08 Oct 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Dec 09 Feb 10 Apr 10 Jun 10

Results Review & Earnings Outlook Recommendation & Investment Risks

 LPI reported 2Q10 net profit of MYR26.4 mln (+16.3% YoY) on  We cut our recommendation on LPI to Hold from Buy with a higher 12-
revenue of MYR188.4 mln (+13.3% YoY). On a cumulative basis, month target price of MYR17.00 (from MYR16.00), after rolling forward
1H10 net profit was MYR64.8 mln (+11.2% YoY) and its revenue grew our valuation period into 2011. Although we like the company for its
12.3% to MYR423.5 mln. With its 1H10 earnings coming in line with positive earnings visibility and strong balance sheet position, we
our expectations, accounting for 49% of our full-year forecast, we are believe that this has been fairly reflected given its share price
maintaining our forward earnings estimates. outperformance this year (+22.5% YTD). Valuations meanwhile, are
not cheap. LPI currently trades at 2011 PE of 15.1x and PBV of 2.3x,
 LPI's revenue rose on the back of higher gross premiums which is a premium to its peer average of 9.1x PE and 1.9 PBV.
underwritten. Meanwhile, its 1H10 net profit was lifted by higher
underwriting profit as the company’s underwriting surplus improved to  Our 12-month target price is derived by applying a target dividend yield
12% (from 9.4% in 1H09). Management guided that its claims ratio of 4.8% (unchanged) to our 2011 (from 2010) DPS forecast of MYR80
were largely unchanged at 49%, slightly below our expectation of 50%. sen (2010: MYR75 sen).

 Concurrently, LPI also announced that it will undertake: (i) a 1-for-2  Separately, we expect to see stronger revenue contribution from
bonus issue and (ii) a 1-for-10 rights issue at MYR7.00/rights share agency sales due mainly to an expansion of its sales force. Year-to-
(estimated 31% discount to its five day weighted average and ex- date, the number of agents had already increased by about 5% from
bonus price). The exercises are expected to be completed by end-2009 and numbers are expected to expand going forward.
September 2010. While we estimate mild earnings dilution of 2% in
2010 and 4.5% in 2011 respectively, we expect positive response to  Risks to our recommendation and target price include: (i) slowdown in
the company’s proposed bonus issue and believe that the pricing of the Malaysian economy affecting the volume of general insurance
the rights issue is attractive. premiums written, (ii) weaker-than-anticipated investment income, and
(iii) an unexpected rise in the claims ratio exceeding industry average.
 The company has declared an interim cash DPS of 10.0 sen, which is
lower than the 1H09 DPS of 26.25 sen, but compensation takes the
form of the bonus issue and discounted rights issue.

Key Stock Statistics Per Share Data


FY Dec. 2009 2010E FY Dec. 2007 2008 2009 2010E
Reported EPS (sen) 91.6 97.3 Book Value (MYR) 2.67 2.62 6.49 6.71
PER (x) 17.8 16.7 Cash Flow (sen) 66.3 78.0 93.8 99.5
Dividend/Share (sen) 67.5 75.0 Reported Earnings (sen) 63.7 75.7 91.6 97.3
NTA/Share (MYR) 6.49 6.71 Dividend (sen) 110.0 85.0 67.5 75.0
Book Value/Share (MYR) 6.49 6.71 Payout Ratio (%) 127.2 83.8 73.7 77.1
No. of Outstanding Shares (mln) 138.7 PER (x) 25.5 21.5 17.8 16.7
52-week Share Price Range (MYR) 11.20 - 16.28 P/Cash Flow (x) 24.6 20.9 17.4 16.4
Major Shareholders: % P/Book Value (x) 6.1 6.2 2.5 2.4
Tan Sri Dato' Sri Dr. Teh Hong Piow 44.4 Dividend Yield (%) 6.8 5.2 4.1 4.6
Nipponkoa Insurance Co., Ltd 8.6 ROE (%) 22.9 28.4 19.9 14.6
Net Gearing (%) NA NA NA NA

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LPI Capital
Recommendation: HOLD
Stock Code: 8621 Bloomberg: LPI MK Price: MYR16.28 12-Month Target Price: MYR17.00 Date: July 9, 2010

Quarterly Performance
FY Dec. / MYR mln 2Q10 2Q09 % Change
Reported Revenue 188.4 166.3 13.3
Reported Operating Profit 35.7 29.7 20.2
Depreciation & Amortization NA NA NA
Net Interest Income / (Expense) NA NA NA
Reported Pre-tax Profit 35.9 30.0 19.7
Reported Net Profit 26.4 22.7 16.3
Reported Operating Margin (%) 18.9 17.9 -
Reported Pre-tax Margin (%) 19.0 18.0 -
Reported Net Margin (%) 14.0 13.7 -
Source: Company data

Profit & Loss


FY Dec. / MYR mln 2008 2009 2010E 2011E
Reported Revenue 638.7 738.3 841.6 966.5
Reported Operating Profit 141.0 160.4 181.0 201.2
Depreciation & Amortization -3.2 -3.0 -3.1 -3.2
Net Interest Income / (Expense) NA NA NA NA
Reported Pre-tax Profit 141.6 161.3 181.0 201.2
Effective Tax Rate (%) 26.4 21.8 26.0 26.0
Reported Net Profit 104.2 126.1 133.9 148.9
Reported Operating Margin (%) 22.1 21.7 21.5 20.8
Reported Pre-tax Margin (%) 22.2 21.9 21.5 20.8
Reported Net Margin (%) 16.3 17.1 15.9 15.4
Source: Company data, S&P Equity Research

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Recommendation and Target Price History P rice (M YR)


Date Recommendation Target Price 17.0
New Hold 17.00
8-Jan-10 Buy 16.00 16.0

9-Oct-09 Buy 14.00 15.0


7-Jul-09 Buy 13.00
9-Apr-09 Strong Buy 12.00 14.0
13-Oct-08 Buy 12.00
13.0
16-Apr-08 Buy 14.00
25-Jan-08 Buy 15.00 12.0
10-Oct-07 Buy 13.00
11.0

10.0

9.0

8.0
Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10

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