Company Overview: Nib Holdings Limited (ASX: NHF) is a private health insurer in Australia and New Zealand, which is engaged in the distribution of private health insurance to residents of Australia and New Zealand as well as international students and visitors. The company, through its Travel business segment, offers the sale and distribution of travel insurance policies across the world. With International (Inbound) Health Insurance, the company provides health insurance products for international students and workers while New Zealand Residents Health Insurance is engaged in core product offering within the New Zealand private health insurance industry.
 

NHF Details
 
  
Strong Group Financial Performance: Nib Holdings Limited (ASX: NHF) is a private health insurer in Australia and New Zealand, whereby it underwrites and distributes private health insurance to residents as well as international students and visitors to Australia. As on 16 March 2020, the market capitalization of the company stood at $1.81 billion. The company reported another year of strong group financial performance, with an increase in earnings and membership growth across all business segments, reflecting its commitment to meet the needs of members and travellers. During FY19, total Group revenue rose by 8.3% to $2.4 billion, resulting in the group underlying operating profit accretion of 9.2% to $201.8 million. For FY19 net profit after tax (NPAT) was $149.3 million, up by 11.8%, with net investment income of $36.1 million, reflecting an increase of 22% while earnings per share were 32.9 cents per share, up by 11.9% on pcp. A key contributor to the company’s top-line growth is its above-industry policyholder growth for over 15 years. Based on sound financial results, the Board declared a final fully franked dividend of 13 cents per share, bringing the total full-year dividends to 23 cents per share. During the year, the company funded approximately 35,000 rehabilitation admissions and had about 2,300 members with claims greater than $50,000 for the year and hence paid out record claims of $1.8 billion in the year. The company has a sound strategy and capability across the entire organization with the group net membership growth of 5.7%. The company also continued to pursue and invest in programs, helping its members lead a healthier life. During 1HFY20, Assets/Equity ratio of the company stood at 2.5x, lower than the industry median of 5.13x, with Debt/Equity ratio of 0.52x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR (Compound Annual Growth Rate) of 10.08% in revenue and a CAGR of 18.47% in gross profit, indicating future success and shareholders returns. 

The company has also released its half-year results for the period ended 31 December 2019, wherein it reported growth in memberships and premium revenue. The company also reported higher claims inflation across nib’s insurance businesses. NHF also stated that nib Travel is now Australia’s third-largest travel insurer and is aiming some clear targets for growth and profitability.

NHF is expected to improve the attraction of private health insurance and anticipates lower costs with new market opportunities. The outlook of all the company’s businesses remains positive, supported by strong growth prospects, increasing scale and ongoing stable margins. The company is investing significantly in programs and systems to mitigate risks of fraud and overpayments. 


FY19 Financial Performance (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Nib Holdings Limited. The Vanguard Group, Inc. is the largest shareholder in the company, with a percentage holding of 5.01%. 


Top 10 Shareholders (Source: Thomson Reuters)


Key Margins (Source: Thomson Reuters)

Strong Member Growth and Increasing Revenues: The company has recently released its interim results for the period ended 31 December 2019, wherein it reported an increase of 6.4% in revenue to $1.3 billion, driven by growth in memberships and premium revenue. During the half-year, sales of the company went up by 12% relative to 1H19, with nib accounting for almost 38% of total industry policyholder growth for the period. During 1H20, the company grew its overall memberships by 1.4% and paid $126.5 million to its health insurers, reflecting an increase of 10.3% on 1H19. In the same time span, net investment income of the company witnessed a substantial increase of 740% to $12.6 million, up from $1.5 million in 1H19 with stable private health insurance profit margins. During 1H20, the company made decent progress in reducing its operating expenses and hence reported a net profit after tax of $57.1 million. This resulted in strong business fundamentals with ROIC of 16.7% and statutory EPS of 12.6 cents per share. The company has also declared a fully franked interim dividend of 10.0 cents per share which is to be paid on 7 April 2020.  


1H20 Financial Performance (Source: Company Reports)

Performance of Segments in 1H20: The company reports its performance in four segments, namely Australian Residents Health Insurance (arfi), New Zealand Residents Health Insurance, International (Inbound) Health Insurance and nib travel. During 1H20, the company’s New Zealand business delivered a stand-out operating performance with growth of 13.9% in revenue and an increase of 16.8% in underlying operating profit (UOP). The company’s international students and workers businesses showed its usual good growth in 1H20 but with lower profit margins. In the same time span, NHF Travel segment also witnessed growth in sales and operating income. During the half-year, the company’s International (inbound) health insurance business generated strong double-digit top-line growth with some re-setting of margins driven by growth in net policyholders. In the same time span, premium revenue went up by 3.8% in Australian Residents Health Insurance business with a decline in management expenses by 6.4%, reflecting its focus on operational efficiencies.   

Lowest Premium Change in 17 Years: The company has announced the creation of a joint venture with Cigna Corporation wherein each company will contribute $10 million in start-up funding. The joint venture will help the company in analyzing and interpreting underlying individual disease risk and will provide guidance on how this risk can be best prevented. Beyond that, it will deliver a range of products and services across the Nib Group and later to other health payers and clients. The company has also announced that it delivered the lowest increase in health insurance premiums by an average of 2.90% from 1 April 2020.

Future Expectations and Growth Opportunities: The company remains fundamentally strong with its significant transformational effort to make future value proposition. NHF has made some technological advances which will help the company to prevent or treat the disease. NHF has a clear value to fulfil the vision and create enterprise value. The company has several other initiatives to improve the attraction of private health insurance and reduce costs as well as exploit new market opportunities.

NHF expects a positive near-term outlook with growth of 2%- 3% per annum in net policyholders. For the arhi business segment, the company is targeting a net margin of approximately 6% and expects M&A possibilities in the medium term. The company also expects net insurance margins for adjacent businesses for FY20 to be consistent with 1H20. The company has reaffirmed FY20 Group UOP guidance of at least $170 million with Statutory Operating Profit of at least $150 million. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Cash Flow Based Relative Valuation Approach

Price to Cash Flow Based Relative Valuation Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of NHF is trading close to its 52-weeks’ low level of $3.335, proffering a decent opportunity for accumulation. The company has an initiative wherein a group of specialists guarantees world-class treatment with no out-of-the-pocket expense. It is also investing in programs and systems which will mitigate the risk of fraud and overpayments. The company’s insurance margins have been higher in recent years and represent a good return on invested capital. Considering the trading levels, decent financial performance, and modest outlook, we have valued the stock using price to cash flow based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Medibank Private Ltd (ASX: MPL), Suncorp Group Ltd (ASX: SUN) and Challenger Ltd (ASX: CGF) as peers. Hence, we recommend a “Buy” rating on the stock at the current market price of $3.950, down by 0.504% on 16 March 2020. 
 
 
NHF Daily Technical Chart (Source: Thomson Reuters)

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