PP 7767/09/2010(025354)

9 July
RHB2010
Research

Malaysia Corporate Highlights

Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e 9 July 2010
MARKET DATELINE

LPI Capital Share Price

Fair Value
:
:
RM16.28
RM19.23
Below Expectations; Proposed Bonus Issue And Recom : Outperform
Rights Issue (Maintained)

Table 1 : Investment Statistics (LPI; Code: 8621) Bloomberg: LPI MK

Net Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing DY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009(f) 738.3 126.1 90.9 21.0 17.0 87.0 2.4 3.7 14.0 0.1 4.4
2010(f) 894.7 154.5 111.4 22.5 13.9 106.0 2.3 3.9 16.4 0.1 5.3
2011(f) 1,070.7 177.8 128.2 15.1 12.1 120.0 2.2 4.1 18.0 0.1 6.1
2012(f) 1,293.2 213.4 153.8 20.0 10.1 149.0 2.0 4.6 20.5 Net cash 7.4

Main Market Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates
♦ Below expectations, but no surprise. LPI reported 1HFY12/10 net profit RHBRI Vs. Consensus
of RM64.8m (+11.2% yoy), which accounted for 42% of our and 44% of Above
consensus full-year estimates respectively. However, we note that 2Q In Line
earnings have consistently been the weakest, mainly due to the lower Below
investment income at group level as dividends from Public Bank are
Issued Capital (m shares) 138.7
recognised in 1Q and 3Q.
Market Cap (RMm) 2,258.0
♦ Better underwriting performance. 2Q revenue grew 13.3% yoy on the Daily Trading Vol (m shs) 0.05
back of higher gross premiums, while PBT grew by 19.7% due to higher 52wk Price Range (RM) 11.2-16.28
underwriting surplus. Qoq, revenue declined by 19.8% due to 1Q being Major Shareholders: (%)
seasonally stronger while net profit declined by 31% as a result of higher tax Tan Sri Dato’ Dr. Teh 44.06
Hong Piow
rate and the lower investment income at group level (RM23.6m vs. Kepunyaan Chinta 8.52
RM0.4m). Underwriting surplus was better by 36.1%, due to lower
FYE Dec FY10 FY11 FY12
management expense and claims ratios.
EPS chg (%) - - -
♦ Dividend of 10 sen declared. LPI declared a single-tier interim net Var to Cons (%) 4.7 5.7 3.2
dividend of 10 sen for 2QFY12/10, which is low, compared to the dividend in
the same period last year of 26.25 sen.
♦ Bonus issue. As highlighted in our previous report, we expected LPI to
PE Band Chart

undertake a corporate exercise to increase its shares liquidity. LPI proposed

a 1-for-2 bonus issue, which will result in an issuance of up to 69.4m new
PER = 19x
shares. LPI also proposed a 1-for-10 rights issue at an issue price of RM7.00, PER = 16x
PER = 13x
which will further result in an issuance of up to 13.9m new shares. The
proceeds of up to RM95.3m from the rights issue will be utilised for working
capital purposes.
♦ Dilution effects. Based on the proposals, we estimate that EPS will be
diluted by 4.7% for the rights issue (see Table 3). However, we are leaving
Relative Performance To FBM KLCI
our forecasts unchanged until the approval of the proposals, which we
understand would be by the end of the 3Q.
LPI Capital
♦ Risks: 1) Change in government policy that may result in lower fire
premium; 2) Jump in claims ratio; 3) Combined ratio may exceed 100%;
and 4) Intense competition from insurance sector liberalisation.
FBM KLCI
♦ Forecasts. As the 2Q is normally the weakest quarter, we believe that LPI
will be able to meet our full-year forecasts in the 2H FY10. Thus, we are
leaving our earnings forecasts unchanged.
♦ Investment case. LPI continues to provide steady growth on the back of a
healthy premium mix. Furthermore, stock liquidity will improve after the
completion of the bonus and rights issues, increasing its attractiveness. We
thus maintain Outperform call on the stock, with a new fair value of
Yap Huey Chiang
RM19.23 after rolling forward our valuation base year to FY11 (from FY10 (603) 92802641
previously) with an unchanged target PER of 15x. yap.huey.chiang@rhb.com.my

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Table 2. Effects of proposal on unisems share capital

Share capital Par value No. Shares Value Theoretical ex-price
(RMm)
Existing @ 8 Jul 10 1 138.7 138.7 16.28 (current)
Upon completion of bonus issue* 1 208.1 208.1 10.85
Upon completion of rights issue* 1 222.0 222.0 10.17
*Assuming maximum scenario that all the treasury shares held by the company are resold in the open market
Source : Company

Table 3. Theoretical EPS dilution from bonus issue and rights issue
Before Bonus Issue Bonus Issue
FY12/11 (RMm)
+
Rights issue
177.8 177.8 177.8
Net profit
2.9
Interest earned*
177.8 177.8 180.7
Adjusted net profit
138.7 208.1 222.0
Share capital (m shares)
128.2 85.4 81.4
FD EPS (sen)
-4.7
Chg %

*based on rights issue price of RM7 and assumed 3% interest earned

Source: Company, RHBRI estimates

Table 4. Summary of quarterly results

FYE Dec (RMm) 2Q09 1Q10 2Q10 Qoq Yoy 1H09 1H10 Yoy Comments
(%) (%) (%)
Revenue 166.3 235.1 188.4 (19.8) 13.3 377.3 423.5 12.3 Higher yoy due to higher gross
premium underwritten while the
decline qoq was mainly because 1Q
tends to be a seasonally stronger
quarter.
Profit from general 30.6 26.8 36.9 37.5 20.5 51.1 63.7 24.6 Higher qoq due to lower
insurance management and claims ratio.
Others (0.9) 21.8 (1.2) (105.3) 29.0 20.5 20.7 0.9 Mainly relates to dividend income
from Public Bank shares and
interest received from fixed income
securities.
Associate 0.3 0.2 0.2 5.3 (33.3) 0.6 0.4 (39.6)
Pretax profit 30.0 48.8 35.9 (26.5) 19.7 72.2 84.7 17.3
Taxation (7.3) (10.5) (9.5) (10.1) 30.3 (14.0) (20.0) 42.5
Tax rate (%) 24.2 21.5 26.3 22.4 8.9 (19.4) (23.6) 21.5 Effective tax rate higher than
statutory rate due to certain non-
tax deductible expenses.
Net Profit 22.7 38.3 26.4 (31.0) 16.3 58.2 64.8 11.2
Source: Company

Table 5. General Insurance Quarterly Results

FYE Dec (RMm) 2Q09 1Q10 2Q10 Qoq Yoy 1H09 1H10 Yoy Comments
(%) (%) (%)
Surplus before 45.5 44.0 50.0 13.6 9.9 74.4 94.0 26.3 Higher due to lower claims ratio,
management despite the lower revenue.
expenses
Management expense (20.4) (22.5) (20.7) (8.0) 1.6 (39.0) (43.3) 11.0
Underwriting surplus 25.1 21.5 29.2 36.1 16.7 35.5 50.7 43.0
Investment income 4.0 4.8 4.8 1.2 21.2 13.4 9.6 (28.4)
Other income 1.6 0.6 2.8 391.2 79.3 2.3 3.4 49.0
Transfer to P&L 30.6 26.8 36.9 37.5 20.5 51.1 63.7 24.6

Source: Company

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Table 6. Earnings Forecasts Table 7. Forecast Assumptions

FYE Dec FY09 FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
Premium growth
21.0 21.0 21.0
Turnover Retention ratio
738.3 894.7 1,070.7 1,293.2 64.0 64.0 64.0
Premium NEP/GWP
678.0 820.4 992.7 1,201.1 61.1 61.1 61.1
Invt income NEP/NWP
62.7 74.3 78.0 92.0 95.4 95.4 95.4
Claims ratio
48.0 48.0 48.0
Underwriting surplus Commission ratio
126.2 149.3 176.5 219.4 9.2 9.2 9.2
Profit frm s/holders fund Mgmt exp ratio
34.2 47.8 50.5 53.2 18.5 18.5 18.5
Associate Total ratio
0.9 0.9 0.9 1.0 75.7 75.7 75.7
Invt return
2.2 2.2 2.2
Pretax
161.3 198.0 227.9 273.6 Source: Company, RHBRI estimates
Tax
(35.2) (43.6) (50.1) (60.2)
Net
126.1 154.5 177.8 213.4
Source: Company, RHBRI estimates
IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad

(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The

opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or

be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be

construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any

manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons

may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives

of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate

particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or

strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts

any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing

investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB

Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity

securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,

officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other

services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect

information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based

upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more

over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on

higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended

securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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