Company Overview: nib holdings limited (ASX: NHF) is a private health insurer in Australia and New Zealand, which underwrites and distributes private health insurance to Australian and New Zealand residents as well as international students and visitors to Australia. Through its nib Travel business, it also specializes in the sale and distribution of travel insurance policies globally. During the year, the Group commenced specialist health care data science services through its joint venture with Cigna, Honeysuckle Health.

NHF Details

Well-Capitalized and Increased Market Share: nib holdings limited (ASX: NHF) is a private health insurer in Australia and New Zealand, which underwrites and distributes private health insurance to Australian and New Zealand residents as well as international students and visitors to Australia. As on 9 November 2020, the market capitalization of the company stood at ~$1.99 billion. Despite the disruption caused due to the COVID-19 health pandemic, the company reported another year of decent progress with the help of group strategy, outlook, and underlying commercial performance.

Despite the tough macro conditions, the group absorbed the impacts of COVID-19 and reported an increase of 3.4% in revenue to $2.5 billion, with an increase in its policyholders by 1.9% to cover ~1.2 million people in its flagship Australian Residents Health Insurance business. The company’s overall market grew by 0.4% and reported decent margins for travel sector, generating a return on invested capital of 11.2% for the group. During the year, underlying operating profit of the company stood at $150.1 million and investment income witnessed a decline of 54% to $16.6 million due to volatile equity markets. The company decided to pay a fully franked final dividend of 4 cents per share, bringing the full-year dividend to 14 cents per share, representing 71% of NPAT.

FY20 Financial Highlights (Source: Company Reports)

During FY20, the company was well-capitalized with available capital of $57.0 million above internal targets and gearing ratio of 28.3%. The company well adapted to the COVID-19 pandemic environment and seems to be in strong shape. The pandemic has clearly heightened the potential risk of disease and therefore, there is a higher need for health protection. The company has accelerated its plans to timely benefit from upcoming opportunities and is focused on member satisfaction.

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%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During FY20, the company reported changes in premium earned of 3.3%, lower than the industry margin of 10.3%. At the end of the year, the company's assets/equity ratio stood at 2.77x lower than the industry median of 6.18x. This indicates that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. In the same time span, debt/equity ratio of the company was 0.52x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Segment Performance: The company records its performance in four segments namely, Australian Residents Health Insurance, New Zealand Residents Health Insurance, International (Inbound) Health Insurance and nib Travel. The company’s core earnings driver, arhi accounted ~89% of its underlying operating profit (UOP). In challenging market conditions, arhi reported premium revenue of $2.1 billion, delivering a net profit margin of 6.4%. The company’s diversified and multi-channel distribution strategy helped deliver net policyholder growth of 1.9%. On the other hand, nib New Zealand delivered a positive operating performance with improving revenue and earnings. For the segment, UOP went up by 18.2% to $23.4 million. The company’s organic growth strategy continued to yield decent results with a growth of 7.4% in net policyholders. Despite the headwinds due to travel restrictions, iihi continued to report healthy revenue growth with premium revenue up by 11.8% to $123.1 million. However, its travel insurance business, nib Travel, was impacted by COVID-19 and reported a UOP loss of $19.7 million.

Five Year Financials Summary: Over the span of 5 years from FY16 to FY20, the company has reported decent results, with net premium revenue increasing to $2,439.6 million in FY20 from $1,818.7 million in FY16. In the same time span, the company saw a continued increase in gross margin from $337.7 million in FY16 to $506.2 million in FY20. The growth in underlying operating profit was marginal and went up to $150.1 million in FY20 as compared to $132.0 million in FY16. In the last four years from FY16 to FY19, NPAT witnessed a continued increase, however, saw a decline in FY20 driven by the impact from COVID-19 pandemic. The operating cash flow of the company witnessed a continuous rise in the past five years and the debt levels have been stable over the past three years.

Five Year Summary (Source: Company Reports)

Key Investment Risks: NHF has established policies for the oversight and management of material business risks. In terms of the principle risks, COVID-19 has thrown up many new scenarios. NHF may be subject to significant claims inflation which may not be adequately covered by premium price increases and/or product design change. It is also susceptible to pricing risk, changes in the Government policies and regulations, and general economic conditions. Moreover, there are risks associated with the merger and acquisition strategy including integration risks, weak diligence, overpaying for the target etc.

Outlook: The company may witness near-term headwinds and expects weak conditions in key markets to continue in the short run. However, NHF retains an ability to mitigate the impact through further cost initiatives and accretive revenue opportunities. The company seems well-positioned to navigate current market conditions and capitalize on growth opportunities. The company is taking various initiatives to protect and support its members and has accelerated its plans to better manage disease risk amongst members and is moving faster with investment in digital health. It remains cognizant of maintaining a strong capital position in a COVID-19 crisis and is acknowledging the need to balance and return to shareholders with regulatory guidance.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The dynamic nature of the COVID-19 pandemic during the final months of the financial year has proven to be a true test of resilience for NHF. The company retains confidence in the private health sector and is likely to see an expanded role in healthcare. As per ASX, the stock of NHF is trading close to its 52-weeks’ low levels of $3.335, proffering a decent opportunity for accumulation. The stock of NHF gave a return of 1.34% in the past three months and a return of 4.62% in the last one month. On a technical front, the stock of NHF has a support level of ~$4.047 and a resistance level of ~$4.886. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target price, offering an upside of lower double-digit (in % terms). For the said purposes, we have considered Insurance Australia Group Ltd (ASX: IAG), QBE Insurance Group Ltd (ASX: QBE) and Steadfast Group Ltd (ASX: SDF) as peers. Considering the current trading levels, healthy capital position, decent performance in the past five years, and strength in the times of uncertainty, we recommend a ‘Buy’ rating on the stock at the current market price of $4.54, up by 3.890% on 9 November 2020.

NHF Daily Technical Chart (Source: Company Reports)

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