Is LPI Capital Bhd The Best Insurer To Invest In?

Founded in 1962, LPI Capital Bhd (LPI) has established itself as one of the major general insurers in Malaysia. Presently, it offers a wide range of products which include mainly fire, motor, and marine insurance. As at 12 February 2019, LPI is worth RM 6.74 billion in market capitalization.

Here, I’ll bring an update on its latest financial results and assess its investment potential with the help of a couple of valuation tools. Hence, here are 11 things that you need to know about LPI before you invest.

  1. Operating Revenue
    LPI has achieved CAGR of 9.0% in operating revenues to RM 1.51 billion in 2018 from RM 698.5 million in 2009. This is mainly contributed by an ongoing increase in gross earned premiums from fire, motor, and other products for the last 10 years. It has offsetted multiyear decline in sales for its marine products since 2015.

Source: Annual Reports of LPI Capital Bhd

  1. Investment Income
    LPI has achieved CAGR of 5.3% in investment income to as much as RM 99.8 million in 2018 from RM 62.7 million in 2009.

Source: Annual Reports of LPI Capital Bhd

  1. Shareholders’ Earnings
    LPI had achieved CAGR of 10.7% in shareholders’ earnings to RM 314.0 million in 2018 from RM 126.1 million in 2009. It is attributable to main factors such as higher insurance premiums and investment income and having a stable margin due to a well-controlled management expenses, claims incurred, and commission expenses ratios over the last 10 years. In 2016, LPI has reported its highest earnings of RM 437.2 million in the 10-year period. This is because the earnings was inclusive of gains from disposal of long-term investments totalling RM 150.4 million.

Source: Annual Reports of LPI Capital Bhd

  1. Return on Equity (ROE)
    LPI has 10-Year ROE average of 15.39% per year. This means, LPI made, on average, RM 15.39 in earnings a year from every RM 100.00 in LPI’s shareholders’ equity from 2009 to 2018.  

  2. LPI’s Main Asset #1: Public Bank Bhd
    As at 31 December 2018, LPI has other investments of RM 1.4 billion. It comprises of mostly shares of Public Bank Bhd. As at 22 February 2018, LPI is the sixth largest shareholder of Public Bank Bhd as it owns a total of 1.10% shareholdings of the banking group. Looking ahead, LPI would continue to derive long-term dividend income from its shareholdings in Public Bank Bhd, thus, is a key source of passive income to LPI.  

  3. LPI’s Main Asset #2: Fixed & Call Deposits
    As at 31 December 2018, LPI has loans & receivables of RM 1.35 billion. They comprises of mostly fixed and call deposits in local licensed banks in Malaysia. They would provide long-term interest income to LPI, thus, is also another main source of passive income to the insurer.

  4. LPI’s Gearing Ratio
    LPI has achieved CAGR of 12.2% in total assets to RM 4.2 billion in 2018 from RM 1.5 billion in 2009. It is attributable to a continuous rise in the value of shares of Public Bank Bhd and higher amount of cash placed in fixed and call deposits during the period. LPI has maintained its gearing ratio at 50% of its total assets during the 10-Year Period.

    Gearing Ratio
    = (Total Liabilities / Total Assets) x 100%

Source: Annual Reports of LPI Capital Bhd

  1. Tan Sri Teh’s Observations
    Tan Sri Teh Hong Piow is the largest shareholder of LPI, having as much as 42.8% shareholdings in the company. Presently, Teh is appointed as LPI’s Chairman and thus, remains influential to its future performances. Based on the latest Q4 2018 report, Teh commented:

    ‘The Intensifying implementation of BNM’s Liberalisation Framework is presenting new challenges to the general insurance industry especially in the Fire and Motor classes of business. Insurers would be seeking to roll out competitively priced products, thus, exerting greater pressures on margins which results in eroding profitability.’

    ‘LPI would focus on product development, enhancing LPI’s distribution channels, and deepen collaboration with main partners to improve its market share in the future’.

  2. P/E Ratio
    In 2018, LPI has generated 78.83 sen in earnings per share (EPS). Thus, based on its current stock price of RM 16.92 a share, LPI’s current P/E Ratio is 21.46, the highest since 2010.

  1. P/B Ratio
    As at 31 December 2018, LPI has net assets RM 5.41 a share. Hence, its current P/B Ratio is 3.13, which is at its highest since 2010.

  1. Dividend Yields
    In 2018, LPI had declared and paid out 68.0 sen in dividends per share (DPS) to its shareholders. Hence, its dividend yield is 4.02% per year. It is below its 7-Year average of 4.44% per annum.

VIA’s Verdict

LPI has delivered consistent growth in total assets, operating revenues, income from investments, and shareholders’ earnings. They allow LPI to declare and to pay out stable amount of dividends to its shareholders for the past 10 years. As a result, LPI has achieved sustainable long-term growth in its stock price shown with the graph below:

Source: Google Finance

As a value investor, my goal is to invest in shares of fundamentally solid stocks only if their stock prices are ‘reasonably cheap’. Based on the valuation figures above, at current price of RM 16.92 a share, LPI is trading at its highest P/E and P/B Ratio and is now offering the lowest dividend yields since 2010. It means, if I invest in LPI now, my purchase is not as great as shareholders who bought LPI in the past. So, what would I do if I found a good company which is not exactly cheap and undervalued?

Myself: ‘I’ll keep it in my watch list until its valuation figures become attractive in the future. In a way, stock investing is likened to be a fishing game and being patient is a good virtue.’

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