PP 7767/09/2010(025354



9 July 2010 RHB Research

Corporate Highlights
R e su l ts N o t e

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

9 July 2010 Share Price Fair Value Recom : : : RM16.28 RM19.23 Outperform (Maintained)
Bloomberg: LPI MK Net EPS (sen) 90.9 111.4 128.2 153.8 Growth (%) 21.0 22.5 15.1 20.0 PER (x) 17.0 13.9 12.1 10.1 C.EPS* (sen) 87.0 106.0 120.0 149.0 P/NTA (x) 2.4 2.3 2.2 2.0 P/CF (x) 3.7 3.9 4.1 4.6 ROE (%) 14.0 16.4 18.0 20.5 Gearing (%) 0.1 0.1 0.1 Net cash Net DY (%) 4.4 5.3 6.1 7.4


LPI Capital
Below Expectations; Proposed Bonus Issue And Rights Issue

Table 1 : Investment Statistics (LPI; Code: 8621) Net FYE Dec 2009(f) 2010(f) 2011(f) 2012(f) Turnover (RMm) 738.3 894.7 1,070.7 1,293.2 profit (RMm) 126.1 154.5 177.8 213.4

Main Market Listing / Trustee Stock / Non-Syariah-Approved Stock By The SC

* Consensus Based On IBES Estimates RHBRI Vs. Above In Line Below Issued Capital (m shares) Market Cap (RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Tan Sri Dato’ Dr. Teh Hong Piow Kepunyaan Chinta FYE Dec EPS chg (%) Var to Cons (%) FY10 4.7 FY11 5.7 138.7 2,258.0 0.05 11.2-16.28 (%) 44.06 8.52 FY12 3.2 Consensus

Below expectations, but no surprise. LPI reported 1HFY12/10 net profit of RM64.8m (+11.2% yoy), which accounted for 42% of our and 44% of consensus full-year estimates respectively. However, we note that 2Q earnings have consistently been the weakest, mainly due to the lower investment income at group level as dividends from Public Bank are recognised in 1Q and 3Q. Better underwriting performance. 2Q revenue grew 13.3% yoy on the back of higher gross premiums, while PBT grew by 19.7% due to higher underwriting surplus. Qoq, revenue declined by 19.8% due to 1Q being seasonally stronger while net profit declined by 31% as a result of higher tax rate and the lower investment income at group level (RM23.6m vs. RM0.4m). Underwriting surplus was better by 36.1%, due to lower management expense and claims ratios. Dividend of 10 sen declared. LPI declared a single-tier interim net 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 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 shares. LPI also proposed a 1-for-10 rights issue at an issue price of RM7.00, 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 our forecasts unchanged until the approval of the proposals, which we understand would be by the end of the 3Q. 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. 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 RM19.23 after rolling forward our valuation base year to FY11 (from FY10 previously) with an unchanged target PER of 15x.

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PE Band Chart

PER = 19x PER = 16x PER = 13x

Relative Performance To FBM KLCI

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LPI Capital


Yap Huey Chiang (603) 92802641 yap.huey.chiang@rhb.com.my

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9 July 2010

Table 2. Effects of proposal on unisems share capital Share capital Existing @ 8 Jul 10 Upon completion of bonus issue* Upon completion of rights issue* Source : Company Par value 1 1 1 No. Shares 138.7 208.1 222.0 Value (RMm) 138.7 208.1 222.0 16.28 (current) 10.85 10.17 Theoretical ex-price

*Assuming maximum scenario that all the treasury shares held by the company are resold in the open market

Table 3. Theoretical EPS dilution from bonus issue and rights issue Before FY12/11 (RMm)

Bonus Issue

Bonus Issue + Rights issue

Net profit Interest earned* Adjusted net profit Share capital (m shares) FD EPS (sen) Chg %



177.8 2.9

177.8 138.7 128.2

177.8 208.1 85.4

180.7 222.0 81.4 -4.7

*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 Revenue 166.3 235.1

2Q10 188.4

Qoq (%) (19.8)

Yoy (%) 13.3

1H09 377.3

1H10 423.5

Yoy (%) 12.3

Comments Higher yoy due to higher gross premium underwritten while the decline qoq was mainly because 1Q tends to be a seasonally stronger quarter. Higher qoq due to lower management and claims ratio. Mainly relates to dividend income from Public Bank shares and interest received from fixed income securities.

Profit from general insurance Others

30.6 (0.9)

26.8 21.8

36.9 (1.2)

37.5 (105.3)

20.5 29.0

51.1 20.5

63.7 20.7

24.6 0.9

Associate Pretax profit Taxation Tax rate (%) Net Profit Source: Company

0.3 30.0 (7.3) 24.2 22.7

0.2 48.8 (10.5) 21.5 38.3

0.2 35.9 (9.5) 26.3 26.4

5.3 (26.5) (10.1) 22.4 (31.0)

(33.3) 19.7 30.3 8.9 16.3

0.6 72.2 (14.0) (19.4) 58.2

0.4 84.7 (20.0) (23.6) 64.8

(39.6) 17.3 42.5 21.5 11.2

Effective tax rate higher than statutory rate due to certain nontax deductible expenses.

Table 5. General Insurance Quarterly Results FYE Dec (RMm) Surplus before management expenses Management expense Underwriting surplus Investment income Other income Transfer to P&L Source: Company 2Q09 45.5 (20.4) 25.1 4.0 1.6 30.6 1Q10 44.0 (22.5) 21.5 4.8 0.6 26.8 2Q10 50.0 (20.7) 29.2 4.8 2.8 36.9 Qoq (%) 13.6 (8.0) 36.1 1.2 391.2 37.5 Yoy (%) 9.9 1.6 16.7 21.2 79.3 20.5 1H09 74.4 (39.0) 35.5 13.4 2.3 51.1 1H10 94.0 (43.3) 50.7 9.6 3.4 63.7 Yoy (%) 26.3 11.0 43.0 (28.4) 49.0 24.6 Comments Higher due to lower claims ratio, despite the lower revenue.

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Table 6. Earnings Forecasts FYE Dec Turnover Premium Invt income Underwriting surplus Profit frm s/holders fund Associate FY09 738.3 678.0 62.7 126.2 34.2 0.9 FY10F 894.7 820.4 74.3 149.3 47.8 0.9 FY11F 1,070.7 992.7 78.0 176.5 50.5 0.9 FY12F 1,293.2 1,201.1 92.0 219.4 53.2 1.0 Table 7. Forecast Assumptions FYE Dec Premium growth Retention ratio NEP/GWP NEP/NWP Claims ratio Commission ratio Mgmt exp ratio Total ratio Invt return FY10F 21.0 64.0 61.1 95.4 48.0 9.2 18.5 75.7 2.2 FY11F 21.0 64.0 61.1 95.4 48.0 9.2 18.5 75.7 2.2 FY12F 21.0 64.0 61.1 95.4 48.0 9.2 18.5 75.7 2.2

Pretax Tax Net

161.3 (35.2) 126.1

198.0 (43.6) 154.5

227.9 (50.1) 177.8

273.6 (60.2) 213.4

Source: Company, RHBRI estimates

Source: Company, RHBRI estimates

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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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9 July 2010
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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