PP 7767/09/2011(028730)

8 October 2010

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

Resu lt s N ot e
MARKET DATELINE
8 October 2010

LPI Capital Share Price

Fair Value
:
:
RM11.76
RM11.40
Recom : Underperform
Below Expectations
(Downgraded)

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

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 738.3 126.1 57.0 21.0 20.6 1.6 3.7 12.8 0.1 5.7

2010f 873.7 138.3 62.5 9.7 18.8 78.0 1.6 3.9 13.6 0.1 3.9
1,021.4 155.9 70.2 12.4 16.7 90.3 1.7 4.1 16.0 0.1 4.4
2011f
2012f 1,205.0 183.9 82.9 18.0 14.2 - 1.6 4.6 17.9 0.0 5.2

Main Market Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Below expectations. LPI recorded 3QFY12/10 net profit of RM36.2m RHBRI Vs. Consensus
(+36.9% qoq) which brought its 9M10 earnings to RM101m (+10.8% yoy). Above
This accounted for 68.6% and 60% of our and consensus full year In Line
expectations respectively. The deviation was mainly due to lower-than- Below
expected surplus transfer from the General Insurance (GI) account. No
dividend was declared during the quarter. Issued Capital (m shares) 221.3
Market Cap (RMm) 2602.5
♦ Performance review. LPI’s 9M10 earnings grew by 10.8% yoy on the back Daily Trading Vol (m shs) 0.02
of revenue growth of 9.7%. Surplus transfer grew 25.3% yoy, although it
52wk Price Range (RM) 7.95 – 12.4
came in below our expectations at only 65.5% of our full-year forecast. The
Major Shareholders: (%)
9M10 management expenses came in below our expectation (71% of our full
Tan Sri Dato’ Dr. Teh 44.06
year estimate) and we believe the main deviation was due to: 1) lower-than- Hong Piow
expected premium growth; 2) higher-than-expected claims ratio; and 3) Kepunyaan Chinta 8.52
lower-than-expected investment income from its GI account. We are thus
adjusting our FY10-12 assumptions as follows: 1) lower gross premium FYE Dec FY10 FY11 FY12
growth of 18% (from 21% previously); 2) higher claims ratio of 51.5% (from EPS chg (%) (10.6) (12.5) (14.0)
48% previously); and 3) lower insurance fund investment income of 2.1% Var to Cons (%) (19.8) (22.3) -
(from 2.2% previously).
♦ Claims ratio. Although the exact claims ratio number is not available to us PE Band Chart
at present, we believe that the figure was higher than our assumption of
48%, given that 9M10 management expense was only 71% of our estimate.
We believe our new claims ratio assumption is fair at 51.5%, as claims ratio PER = 17x
PER = 14x
has gone as high as 51.2% in FY07-08. Note that this is still significantly PER = 11x
lower than industry average (60-70%), attributed to LPI’s large fire portfolio.
♦ Corporate exercise completed. LPI has recently completed its bonus issue
and rights issues, thus increasing its number of shares outstanding by 60%
to 221m shares. The proceeds from the rights issue of approximately
RM96.4m will be used for working capital purposes. We have previously
estimated an interest earned from the proceeds of approximately RM2.9m, Relative Performance To FBM KLCI
based on an assumption of a 3% interest earned from the proceeds. We are
thus factoring this into our FY11-12 estimates. The impact to FY10 earnings
is minimal. LPI Capital

♦ Risks: 1) Change in government policy that may result in lower car prices;
2) Jump in claims ratio; 3) Combined ratio may exceed 100%; and 4)
Intense competition from insurance sector liberalisation.
FBM KLCI
♦ Forecasts. After adjusting our assumptions, our FY10-12 earnings forecasts
have been revised downwards by 10.6-14% p.a.. Despite the reduced
earnings, we still expect a stronger fourth quarter based on historical trends.
Yap Huey Chiang
♦ Investment case. After our earnings revision, our fair value is now lower at
(603) 92802641
RM11.40 (from RM12.82 previously) based on unchanged target 16x FY11
yap.huey.chiang@rhb.com.my
EPS. We thus downgrade our call on the stock to Underperform.

Please read important disclosures at the end of this report.

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 8 October 2010

Table 2. Summary of Quarterly Results

FYE Dec QoQ YoY YoY
3Q09 2Q10 3Q10 9M09 9M10 Comments
(RMm) (%) (%) (%)
Revenue 206.6 188.4 217.0 15.1 5.0 583.9 640.5 9.7 Mainly due to higher insurance
gross premium underwritten.

Profit fr gen ins 27.0 36.9 34.2 (7.3) 26.7 78.1 97.8 25.3

Others 15.3 (1.2) 12.9 (1,215 (15.7) 35.8 33.6 (6.2) Includes investment income at
.6) holding company.
Associate 0.3 0.2 0.4 84.8 21.6 0.9 0.8 (20.0)
Pretax profit 42.6 35.9 47.4 32.2 11.4 114.8 132.2 15.1
Taxation (9.7) (9.5) (11.2) 18.9 16.0 (23.7) (31.2) 31.7

Tax rate (%) 22.7 26.3 23.7 (10.0) 4.2 62.9 (23.6) (137.5) Effective tax rate lower than
statutory rate due to tax-
exempt dividends received and
certain incomes taxed at
reduced rate.
Net Profit 32.9 26.4 36.2 36.9 10.0 91.1 101.0 10.8 Higher underwriting profit
Source: Company

Table 3. General Insurance Quarterly Results

FYE Dec 3Q09 2Q10 3Q10 QoQ YoY 9M09 9M10 YoY Comments
(RMm) (%) (%) (%)

Surplus 40.9 50.0 49.9 (0.2) 21.9 115.3 143.9 24.7 Due to higher premium
underwritten and more favourable
claims ratio.
Management expense (19.9) (20.7) (22.6) 9.1 14.0 (58.8) (65.9) 12.0 Increase in headcount

Underwriting surplus 21.0 29.2 27.2 (6.9) 29.4 56.5 78.0 38.0

Investment income 5.2 4.8 5.9 22.2 12.9 18.6 15.5 (16.9)
Other income 0.7 2.8 1.1 (62.2) 46.3 3.0 4.4 48.4
Transfer to P&L 27.0 36.9 34.2 (7.3) 26.7 78.1 97.8 25.3

Source: Company

Table 4: Earnings Forecast Table 5: Forecast Assumptions

FYE Dec FY09 FY10F FY11F FY12F FY10F FY11F FY12F
Premium growth
18.0 18.0 18.0
Turnover Retention ratio
738.3 873.7 1,021.4 1,205.0 64.0 64.0 64.0
Premium NEP/GWP
678.0 800.0 944.0 1,114.0 61.1 61.1 61.1
Invt inc NEP/NWP
62.7 73.6 77.3 91.0 95.4 95.4 95.4
Claims ratio
51.5 51.5 51.5
Underwriting surplus Commission ratio
126.2 128.5 148.4 181.6 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 79.2 79.2 79.2
Invt return
2.1 2.1 2.1
Pretax
161.3 177.3 199.9 235.8 Source: Company, RHBRI estimates
Tax
(35.2) (39.0) (44.0) (51.9)
Net
126.1 138.3 155.9 183.9

Source: Company, RHBRI estimates

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IMPORTANT DISCLOSURES

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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.

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.

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