By Xavier Kong
Kenanga IB has upgraded LPI Capital Bhd to a “market perform” rating, maintaining its target price of RM13.35 for the insurance player. The upgrade comes on the back of LPI’s disposal of Public Bank Bhd shares, which the research house noted as a viable strategy to boost earnings in the face of a challenging environment.
LPI had disposed of another 2.5 million Public Bank shares on Dec 22, which leaves the group with only a 1.35% stake in Public Bank. This represents the fifth sale of Public Bank shares by LPI, with the first happening in the fourth quarter of 2014. In 2015, LPI has disposed of a total of five million Public Bank shares, for a total gain of RM70.5 million.
The disposal would result in a higher financial year 2015 (FY15) earnings per share by a quantum of 11.2 sen, as the sale consideration stands at about RM37.1 million. However, this gain is non-recurring, and should not affect core FY15 earnings per share.
The rationale behind the disposal was stated by LPI as a move to realise tax-exempt capital gains, as well as to support business growth, with the proceeds of the sale to be used to pay cash dividends to shareholders in the first quarter of 2016, with the balance placed into fixed deposit to generate income from the interest.
“The move appears rational on the back of the less exciting prospects of the insurance sector, where the challenging economy will dampen the growth of the insurance industry moving forward,” said Kenanga, noting that industry growth is expected to be between 3% and 4% for 2015, as forecast by the General Insurance Association of Malaysia.
At the same time, LPI will see a growth in its FY15 nett profit, though lower at 7.2%. However, this is a step up from Kenanga’s previous forecast, which had been a negative growth. The lower growth is due to the high base LPI had in FY14, as well as the larger sale of Public Bank shares that year, which had provided a boost of RM59.9 million.
The disposal will likely result in LPI maintaining a dividend per share of 75 sen, which Kenanga had assumed would drop to 60 sen prior to the latest disposal.
“We thus raised our forecast dividend per share (DPS) for FY15/16E to 75 sen implying a dividend payout of 82%. FY14 dividend payout was at 58% but this is due to the lower number of ordinary shares at 220.5 million before the bonus issue of 110.7 million,” said Kenanga, adding that, for FY16, the research house maintains a forecast DPS of 60 sen per share, implying a dividend payout of 81%, as subdued earnings will restrict dividends declared.
“While LPI is still proving resilient amidst a challenging economic environment, growth is expected to be subdued moving forward. However, given that LPI consistently strives to boost earnings by capital gains, we do not discount further disposal of Public Bank shares to enhance dividends for FY16,” stated Kenanga.
As of the noon close, LPI shares were last traded at RM16.32, up 18 sen on slim volume.
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