LPI ... Jan10

Results Review & Earnings Outlook (Standard & Poor’s Equity Research)

- LPI reported 2009 net profit of MYR126.1 mln (+21% YoY) on revenue
of MYR738.3 mln (+15.6% YoY). This was slightly ahead of our
expectations, coming in higher than our full-year net profit forecast of
MYR120 mln.

- LPI's revenue rose on the back of higher growth in gross premium
underwritten. Meanwhile net profit also saw significant improvement,
supported by better underwriting results. The company’s claims ratio
improved significantly to 47% from 51% in 2008. Underwriting
improvement came predominately in the fire and miscellaneous
segments and management guides that these will be the areas which
the company will look to grow in the near- to mid-term.

- The company announced a net final dividend of 41.25 sen per share
for 2009 (2008: gross final dividend of 55 sen). Cumulative net
dividend of 67.5 sen for 2009 (2008: gross dividend of 85 sen) was,
however, lower than our forecast of 71.25 sen.

- We project its gross premium to grow by 15%-16% in 2010 and 2011,
driven by new branch openings (three new branches in 2010),
increased agency sales force and growing bancassurance sales. In
view of LPI’s prudent management record, we expect its underwriting
results to remain stable and project claims ratio of 50% in the next 2
years. Our 2010 earnings forecast is largely unchanged and we
introduce our 2011 forecast.

Recommendation & Investment Risks
- We retain our Buy recommendation on LPI and raise our target price to
MYR16 (from MYR14). Despite LPI’s stock price reaching record highs
since November 2009, we remain upbeat on the company’s prospects
going forward. We think its earnings outlook is good and its dividend
yield of 4.8% at the last traded price of MYR14.14 is decent.

- Valuation wise, while LPI trades at a premium to its peers on a PER
basis, we believe this is justified given its above industry average
underwriting margin. Moreover, its projected ROAE of 32%-33% in
2010-2011 is attractive, in our opinion.

- Our 12-month target price is derived based on a target net dividend
yield of 4.75% (from 5.25%) on our projected 2010 (from 2009) net
DPS of 75 sen. We believe that a lower net dividend yield target is
warranted, premised on the present low interest rate environment.

- The risks to our recommendation and target price include: (i) slowdown
in the Malaysian economy affecting the volume of general insurance
premiums written, (ii) weaker-than-expected investment income, and
(iii) an unexpected rise in its claims ratio exceeding industry average.