Pressure remains on LPI Capital amid frequent claims, competitive environment

By SHAZNI ONG / Graphic By TMR

LPI Capital Bhd’s earnings are likely to remain affected going forward as increased claims and heightened competitive pricing pressures continue to add pressure on the group, analysts said.

The group’s net profit fell 4.4% to RM87.82 million in the third quarter ended Sept 30, 2019, (3Q19) from RM91.81 million a year ago, as claims increased and gross premium income slowed.

Quarterly revenue rose 8.5% to RM423.84 million in 3Q19 from RM390.59 million the year before.

MIDF Amanah Investment Bank Bhd (MIDF Research) said it’s staying cautious on the group’s growth prospects, given the unfavourable claims environment and escalating competition in the general insurance segment following the liberalisation of motor and fire insurance.

Further liberalisation of the fire insurance segment will also be a concern, as fire insurance alone accounts for about 68% of the group’s underwriting surplus before management expenses.

“We have also observed that the combined ratio for the first nine months of 2019 (9M19) rose to slightly above 70% for the first time in five years, illustrating the increasingly tough operating environment,” the research house wrote in a note on Tuesday.

LPI Capital’s combined ratio for 3Q19 deteriorated to 70.8% from 65.1% previously, while underwriting profit slipped 7.9% to RM75.7 million from RM82.2 million prior.

Nonetheless, the industry’s overall combined ratio of 93.2% as at the first-half of 2019 indicates further headroom for the group to grow its portfolio.

“The announcement in Budget 2020 for rural and general infrastructure works funding, where LPI Capital is a major infrastructure player, would partially support it to weather the structural change,” MIDF Research said.

The firm has maintained a “Neutral” stance on LPI Capital, with an unchanged target price of RM16.20.

Meanwhile, Affin Hwang Investment Bank Bhd (Affin Hwang Capital) downgraded its call on the group to “Hold”, with a lower target price of RM15.90 from RM18.90 previously.

It said while the group’s net profit improved 24% quarter-on-quarter (QoQ) due to higher investment gains and improved underwriting profits, the recovery was not significant enough to meet full-year expectations due to persistently high claims, commission and management expenses.

“Comparatively, 9M19 combined ratio rose to 72.5% against 69.3% in 9M18 and resulted in a marginal decline of 2.6% year-on-year in 9M19 underwriting profit.

“We are revising down our estimated net profit for 2019 to 2022 by 6.9% to 9% as we raise the group claims ratio to between 43% and 44%,” Affin Hwang Capital said in a report yesterday.

“Potential bummers” in the near term for the group could come from the miscellaneous business segment, which covers construction and engineering items, Kenanga Investment Bank Bhd (Kenanga IB) wrote in a separate note.

“We believe that as the segment could be in a lull, it could further dampen the group’s immediate prospects as competitive rates and frequent claims could undermine the group’s profitability.

“On the flip side, this could be cushioned by better performances registered in the motor and marine, aviation and transit businesses,” the research house said.

It maintained its “Market Perform” call on the group, with a lower target price of RM16 versus RM16.50 previously.

Sentiment for the stock could also be steered by the backing from its parent, Public Bank Bhd, which is Malaysia’s second-largest bank by market capitalisation, Kenanga IB added.

Shares of LPI Capital closed 0.52% lower at RM15.40 yesterday, giving the group a market capitalisation of RM6.14 billion.