PP 7767/09/2010(025354

)

Malaysia

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

MARKET DATELINE

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.

♦ ♦

PE Band Chart

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

Relative Performance To FBM KLCI

♦ ♦ ♦

LPI Capital

FBM KLCI

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

177.8

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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9 July 2010
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

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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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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