PETALING JAYA: LPI Capital Bhd’s net profit of RM73.8 million for the first quarter ended March 31, 2023 just about managed to meet the expectations of research houses.
Kenanga Investment Bank Bhd said that the sum made up 22% of their in-house forecasts and 24% of the consensus full year estimates, based on Malaysia Financial Reporting Standards (MFRS) 4.
In Q1 FY2023, total investment income rose by 73% year-on-year (y-o-y) to RM43 million.
Insurance revenue also grew by 11.2% y-o-y to RM431 million in Q1 FY2023, supported by higher revenue from the fire, motor, marine, aviation and transit classes of business.
The investment holding company, which is primarily involved in insurance, was among firms expected to be impacted by the implementation of new accounting standards – MFRS 17 – effective at the start of this year.
“We gather that the transitional impact from the new accounting standard could be more muted as compared to its peers,” it said in a note today.
AmInvestment Bank Bhd noted the adoption of the new standard saw the opening balance of the group’s retained earnings on Jan 1, 2022 increase by RM49.7 million.
“Arising from the impact of discounting on cash flows, LPI’s reinsurance contract assets and insurance contractual liabilities were lowered with the adoption of the new standard,” it said.
“However, due to adjustments to the overprovisioning of insurance contractual liabilities of the previous financial years, the net impact from the implementation of MFRS 17 was positive,” it noted.
Under MFRS 17, LPI recorded an improved underlying net profit of RM74 million, up 13.8% y-o-y compared to the restated earnings for Q1 FY2022, driven by higher investment income.
Additionally, the group reported net fair value gains of RM10.3 million compared to losses of RM4 million in Q1 FY2022, attributed to a recovery in the bond market.
Outlook remains challenging
The research houses expect the outlook to remain challenging with the continued phased liberalisation for the pricing of fire and motor insurance products ahead.
“With more flexibility for fire and motor pricing moving forward, edging closer to a full risk-based pricing, coupled with higher inflation rate which will impact claims cost, the group’s underwriting margins are likely to remain under pressure,” said AmInvest.
LPI’s claims ratio could see some tapering off from the normalisation of overall activities.
However, Kenanga notes reinsurance premiums may continue to increase as flooding occurrences grow more frequent, spurring persistent revaluation of its reinsurance coverage.
“We believe investors may still shy away from the insurance space until the material impact of MFRS 17 becomes more visible,” it said.
“However, we see this as an opportunity to accumulate LPI given that its premium valuation remains justified based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank,” it added.
Kenanga maintained a ‘buy’ call on the stock with a target price of RM14.70, revised upwards from RM12.10.
Meanwhile, AmInvest reiterated a ‘hold’ call with a fair value of RM12.70 from RM12.60 previously.
LPI’s share price ended flat today at RM12.10, giving it a market capitalisation of RM4.82 billion.