By Xavier Kong
Though LPI Capital Bhd remains the largest insurer in the fire segment, it has maintained a rather low profile, despite being founded by Public Bank Bhd founder Teh Hong Piow. Could the insurance player be worth a look?
Business model: LPI Capital Bhd identifies itself as an investments holding company that underwrites general insurance products in Malaysia, Singapore, and Cambodia. The group’s insurance products are available in two segments, personal insurance and business insurance.
Personal insurance covers fires, health, liabilities, motor, personal accidents and schemes, while business insurance covers bonds, engineering, fires, health, liabilities, marine, miscellaneous, motor, packages, personal accidents and schemes.
LPI Capital, incorporated on May 24, 1962 and listed on the Main Market of Bursa Malaysia on Jan 8, 1993, was formerly known as London & Pacific Insurance Company Bhd.
However, after a rationalisation scheme, LPI Capital transferred its entire insurance business to its wholly owned subsidiary – Lonpac Insurance Bhd on May 1, 1999, taking the name of LPI Capital Bhd at the same time. The group’s other subsidiaries include London & Pacific Holdings Sdn Bhd and Public United Leasing & Factoring Sdn Bhd.
Shareholders and management: The largest shareholder in LPI Capital is Selected Holdings Sdn Bhd, with a 16.23% stake in the group. They are followed by Kepunyaan Chintamani Sdn Bhd, with a 13.55% stake, and Public Mutual Bhd, with a stake of 8.58%.
Notably among its individual shareholders is Teh Hong Piow, founder of Public Bank Bhd as well as LPI Capital, with a 1.45% stake, who also serves as the group’s non-independent non-executive chairman. Chief executive officer Tan Kok Guan also maintains a stake in the group, holding a 0.16% stake.
Share price performance:
What analysts think: MIDF Research views the group as a defensive play that has a solid and proven track record with a prudent underwriting practice, a strong agency network and relationship with Public Bank via the common founder of the two groups, and a strong capital adequacy ratio of close to 300%.
The research house also sees the group as having a significant gap to move into in Malaysia, considering total insurance penetration in Malaysia is at 55.5% in 2014. Comparing this to the penetration rates of over 100% in other countries in the region, MIDF noted that there is the potential for the local insurance business to grow further.
“We believe that many Malaysians still have lower insurance coverage than are actually required. In other words, the insurance sector in Malaysia is still relatively under-penetrated; hence there is ample room for growth,” said MIDF.
The group also controls the highest market share for the fire insurance segment in Malaysia, which has been identified as a lucrative segment in Malaysia due to the absence of lumpy claims compared to insurance policies covering major catastrophe risks such as earthquakes, as well as favourable tariff rates.
“Although the fire tariff structure will be abolished in the future, we expect contributions from fire segment for LPI to still grow albeit at lower margins. This is due to its expanding agency network and its relationship with Public Bank for bancassurance business which is expected to grow in tandem with the bank’s loan book,” noted MIDF.
However, RHB IB has noted that, due to detariffication and liberalisation, competition may intensify from other players in the industry.
Furthermore, it was noted that regulatory changes could affect agency and other operating costs, such as the recent implementation of the goods and services tax (GST), which throws in its 6% on all policies except life insurance.
At the same time, while MIDF had identified LPI Capital as one of the larger players in the local insurance sector, RHB IB noted that this is another way of looking at the group’s overdependence on the domestic market.
Earnings forecast:
Stockstalk: LPI Capital has been marked as an interesting dividend play by MIDF, with the research house noting that the stock is defensive, and has a lot of room to grow. The group also has a diversified portfolio, which is expected to mitigate the impact from the detariffication for motor and fire insurance.
There also comes along an increasing awareness for protection amongst individuals and businesses in Malaysia, which bodes well for the sector as a whole. However, this also increases the chances of the group facing stiffer competition from other players in the sector, as noted by RHB IB.
However, the stock had recently gone through a one for two bonus issue of its shares, increasing its shares by 110.66 million shares, in turn diluting share prices for the group, making this an opening for investors looking for a defensive or insurance stock to add to their portfolio.
At the same time, despite the group having no dividend policy, the group has, according to MIDF, consistently rewarded its shareholders with lucrative dividends since 2003. The group also has a capital adequacy ratio of almost 300%, more than the Bank Negara Malaysia requirement of 130%, which should lend the group a proper buffer for expansion, while still continuing generous dividend payments.
To be considered, however, is the possible detariffication of the fire and motor insurance segments, which could lower margins and apply pressure to the group, requiring LPI Capital to utilise some of that buffer to pad itself. Further cause for concern is the implementation of GST, which could serve to further drive down the sale of policies for the group.
Still, the group has strong financials, and has a conservative investment portfolio, which should provide some shelter in the storm that is the implementation of GST.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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