LPI’s disposal of five million Public Bank shares rational, not surprising

by **Cals** Wed 27 Apr 2016, 06:35

LPI’s disposal of five million Public Bank shares rational, not surprising

By Kenanga Research / The Edge Financial Daily | April 26, 2016 : 10:35 AM MYT

This article first appeared in The Edge Financial Daily, on April 26, 2016.

LPI Capital Bhd
April 25 (RM15.76)
Maintain underperform with a higher target price (TP) of RM14.43: LPI Capital Bhd announced the disposal of five million Public Bank Bhd shares, the first for this year (representing 0.13% of Public Bank’s issued shares excluding treasury shares). Post disposal, LPI’s shareholding in Public Bank stands at 1.22%, or 47.2 million shares, excluding treasury shares.

This represents the sixth sale of Public Bank shares (with the first one in the fourth quarter of 2014). According to the announcement, this disposal will result in a gain of around RM77.5 million for financial year 2016 (FY16) net profit or FY16 earnings per share (EPS) of 23.34 sen. Nonetheless, we deem the gain as a noncore item and hence will not impact its FY16 estimate (FY16E) core net profit or core EPS.

The announcement also stated that the rationale for the disposal is to realise tax-exempt capital gains to improve the group’s capital adequacy ratio and to support business growth. The sale proceeds will be placed into fixed deposits or invested in bonds to generate interest income.

We are not surprised by the move and view that the disposal is rational, especially amid less exciting prospects for the insurance sector, where the challenging economy will dampen growth in the insurance industry in 2016. Industry growth is expected to be modest at 2.5% to 3.5% for 2016, as forecast by the General Insurance Association of Malaysia.

Furthermore, with the gradual liberalisation (which was recently witnessed with the introduction of a road map for phased liberalisation of motor and fire tariffs), stiffer competition is likely to be seen with more new products (more competitive rates) to be offered by insurers. We believe this could lead to further margin compression for insurers. As LPI has consistently been striving to boost earnings by capital gains, we do not discount further disposal of Public Bank shares to enhance its dividends for FY16.

While the disposal gain will boost our FY16E net profit/EPS by 23%, we made no change to our FY16E core net profit as any potential incremental income from the disposal is expected to be minimal. We maintain “underperform”. Post announcement, our TP has been raised from RM14.20 to RM14.43 after factoring in the disposal gain of 23.34 sen. This is still based on an unchanged blended FY16E price-earnings ratio (PER)/price-to-book value (PBV) ratio of 17 times/2.5 times respectively (both based on LPI’s average five-year PER and PBV), with an addition of a 23.34 sen gain per share on top of RM14.20. Risks to our call include higher premiums underwritten, hence growth, and a lower-than-expected combined ratio. — Kenanga Research, April 25