Company Overview: nib holdings limited operates as a private health insurer for Australian residents, New Zealand residents, and international visitors and students to Australia. The Company operates through the segments, including Australian Residents Health Insurance, which operates within the Australian private health insurance industry; New Zealand Residents Health Insurance, which operates within the New Zealand private health insurance industry; International (Inbound) Health Insurance, which include the Company's health insurance products for international students and workers, World Nomads Group, which is engaged in distribution of travel insurance products, and nib Options, which enables access to cosmetic and dental treatment for both overseas and also in Australia. It offers nib Travel Insurance, which include round the clock emergency assist; overseas medical and dental; medical evacuation; passport and travel documents; lost, stolen or damaged luggage, and approved medical conditions.
 

NHF Details

Significant Returns to Shareholders Strengthens Confidence: nib Holdings Limited (ASX: NHF) happens to be a private health insurer in ANZ and is primarily engaged in underwriting and distributing private health insurance to residents of ANZ and international students and visitors to Australia. As on December 16, 2019, the market capitalisation of nib Holdings Limited stood at ~A$3.06 billion. The company released a decent set of numbers for FY19, wherein NPAT grew by 11.8% to $149.3 million, and net investment income increased by 22% to $36.1 million against FY18. Resultantly, statutory earnings per share stood at 32.9 cents per share, exhibiting a decent rise of 11.9% on YoY basis. The company’s core arhi (or Australian Residents Health Insurance Business) business led the charge in terms of contribution, as this business accounted for 74.1% of the total earnings. Amidst certain challenges from the macro front and industry headwinds, this business managed to deliver decent results, as its underlying operating profit (UOP) rose 14.4% and amounted to $149.5 million. Notably, premium revenue witnessed a rise of 7.6% to just more than $2.0 billion.

FY19 was a successful year for the group supported by sound execution of its business strategy, member-first focus and capability across the entire organisation. The company’s operating performance for FY19 helped in delivering decent results, and its total group revenue increased by 8.3% to $2.4 billion. Its underlying operating profit (or UOP) increased by 9.2%, and the figure stood at $201.8 million.

The company’s performance has been delivering respectable returns for its shareholders. This can be evidenced by the fact that since the company was listed on ASX in late 2007, its total shareholder return recorded at 1,701% as compared to 66% for ASX 200. Based on the FY19 performance,the Board of Directors declared a fully franked full-year dividend of 23.0 cents per share, reflecting a rise of 15% on Y-o-Y basis, and payout ratio of 70% of the earnings. The company’s full-year dividend consists of an interim dividend of 10.0 cents per share, and a final dividend of 13.0 cents per share.

Moving forward, there are expectations that stabilised balance sheet, lower exposure towards long-term debt, business strategy and respectable operational capabilities are expected to act as tailwinds for long-term growth. 


Performance Highlights (Source: Thomson Reuters)

Top 10 Shareholders: The following image provides a broader overview of the top 10 shareholders in NHF:


Top 10 Shareholders (Source: Thomson Reuters)

Overview of Margins: The company’s Debt/Equity ratio stood at 0.37x in FY19, which reflects a fall from FY18 figure of 0.41x and, therefore, it can be said that the company’s balance sheet has been deleveraged in FY19 on a YoY basis. The lower debt on the balance sheet generally reflects that the company has a stabilised balance sheet, and it can focus on its long-term strategic goals. Moreover, lower debt broadly places the company in a position to meet its objectives in an effective way. The company’s percentage long-term debt to total capital stood at 26.8% in FY19, which is lower than FY18 figure of 29.1% and, therefore, it looks like NHF has reduced its exposure towards the long-term debt. It needs to be noted that lesser reliance on long-term debt reduces the company’s obligations, and it can make deployments towards more profitable avenues.
 

Key Metrics (Source: Thomson Reuters)

Announcement About Joint Venture with Cigna: nib Group Limited recently made an announcement about the creation of the specialist healthcare data science and services company. This serves a specific purpose of delivering better health outcomes for the members and communities in general. The release also added that joint venture initiative between nib and Cigna Corporation would witness each contributing AUD$10 million towards start-up funding. The joint venture would be operating independently of nib and would be led by Rhod McKensey, who has been the Group Executive of nib's arhi business since 2013. The purpose of joint venture revolves around (1) analysing and interpreting the underlying individual disease risk, (2) providing guidance with regards to how the risk could be prevented, mitigated, managed or treated, and (3) delivering healthcare programs, services as well as interventions which are relevant to disease risk profile.

Announcement About Lowest Premium Change: The company private health funds throughout Australia received the approval from Federal Minister for Health with respect to the changes towards private health insurance premiums. After the approval from Federal Minister for Health, nib would be increasing the health insurance premiums by an average of 2.90% from April 1, 2020. The company’s key personnel stated that record low premium increase implies that the company is committed towards keeping health insurance affordable.

The release also added that reality for both the private health insurance, and healthcare industry, which include government, who fund the lion’s share of the nation’s healthcare, is that cost as well as frequency of the medical treatment is rising. This reflects that the consumers have been receiving the treatment they need for sickness or injury. However, it places pressure on the claim’s costs. The company added that it would be notifying the members of premium changes in the span of coming months, and the changes, as mentioned above, would be effective from April 1, 2020.

What to Expect from NHF Moving Forward: nib Group Limited has recently reaffirmed the financial year 2020 (or FY20) underlying operating profit (or UOP) guidance of minimum $200 million (and statutory operating profit of minimum $180 million). The company stated that, based on the current market trading conditions, the company is maintaining the current FY20 guidance, and it is also reiterating the arhi’s net margin, which is anticipated to be around 6% this financial year. NHF added that overall hospital inflation in FY19 stood at 3.2%, which represents the combination of episode growth as well as episode price inflation and its significant risk equalisation contribution. As was expected, mental health waiver played a major role in the inflation, in terms of utilisation and costs per episode, however, there are expectations that the impact might moderate in FY20.


FY 2020 Forecast (Source: Company Reports)

The company has provided a detailed outlook and stated that arhi is expected to witness organic growth in the range of 2%-3% p.a. and the insurance margins are expected to be around 6%. With respect to iihi (or International Inbound Health Insurance), it was added that the business might witness continued organic growth as well as robust insurance margins.


Key Valuation Metrics (Source: Thomson Reuters), *NTM: Next Twelve Months

Valuation Methodology:

Method 1: EV/EBITDA Based Valuation

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Method 2: Price to Cash Flow multiple Approach

Price/Cash Flow multiple (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: On a YTD basis, NHF’s share has delivered the return of 30.35% while, in the time frame of the past one year, the stock’s return stood at 39.87%. It looks like the company is optimistic with respect to New Zealand health insurance and it is expecting that there would be continued organic growth and the insurance margins are expected to be in the range of 8%-9%. From the analysis standpoint, it can be said that the company has been performing well as, between FY 2015- FY19, its total operating revenues have witnessed a compound annual growth rate of 10.25% and, during the same time frame, its underlying operating profit encountered a CAGR of 23.06%. These increases reflect that the company is possessing decent operational capabilities. In the time span of FY15- FY19, its dividends have encountered CAGR of 18.92% and, therefore, it can be said that NHF has been delivering returns to its shareholders across different business cycles. Based on the foregoing, we have applied two relative valuation methods, i.e., EV/EBITDA multiple and Price to Cash Flow multiple, and arrived at a target price of high single-digit to low double-digit growth (in percentage terms). Hence, we give a “Buy” rating on the stock at the current market price of $6.91 (up 3.134% on 16 December 2019).

 
NHF Daily Technical Chart (Source: Thomson Reuters)

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