Company Overview: nib holdings limited (ASX: NHF) operates as a private health insurer in Australia and New Zealand. The company underwrites and distributes private health insurance to Australian and New Zealand residents as well as international students and visitors to Australia. NHF also specialises in the sale and distribution of travel insurance policies globally via its nib travel business.

NHF Details

Entry into New Markets and Strong Capital Generation to Aid Future Business Growth: The company mainly operates through four segments with the revenue contribution of Australia (~84.9%), New Zealand (~10.6%), International (~4.4%) and nib Travel (~0.4%) in 1HFY22. In the past year, the company has entered and grown new markets with a non-PHI membership offering and treatment packages specific to a wide range of conditions. nib’s business strategy mainly revolves around PHI (Private Health Insurer) enhancement and expansion, new and adjacent markets, claims cost containment and affordability and system value capture. At the end of 1HFY22, the company experienced strong capital generation from the business, evident by the increased closing capital of $89.5 million as compared to $65.7 million as of 30 June 2021. With respect to Australia, the company is optimistic about the opportunity to outperform the market in 2HFY22 on the back of initiatives that include brand re-fresh, new product concepts, additional distribution partnerships and increased investment in marketing.  

Key Takeaway from 1HFY22:

• During the half-year ended 31 December 2021, the company recorded decent financial and operational performance evident by the growth of ~8.2% in Group underlying revenue to $1.4 billion. This was aided by an uplift in policyholders as well as COVID-19 related disruption to elective surgery and allied healthcare like dentistry.
• The company recorded a growth of 28.5% in underlying operating profit (UOP) to $109.6 million. Net profit after tax (NPAT) for the period amounted to $81.2 million, reflecting a rise of 24.7% over pcp.
• During the half-year, the company declared a fully franked interim dividend of 11.0 cents per share as compared to 10 cents per share on 1HFY21. Despite the growing dividend, nib’s free cash flow was positive to $17.1 million as compared to -$83.9 million in 1HFY21.

Financial Summary (Source: Analysis by Kalkine Group)

Change in Directors’ Interest: Recently, the company announced that Mark Fitzgibbon had made a change to holdings in the company by disposing 40,000 ordinary shares at the price of ~$250,400.00.

Top 10 Shareholders: The top 10 shareholders together form around ~13.02% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and Vanguard Investments Australia Ltd. are holding a maximum stake in the company at ~4.51% and ~1.57%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HFY22, the company recorded a debt-to-equity ratio of 0.39x as compared to 0.46x in 1HFY21.

Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Competitive Pressure: The company’s operational and financial performance could be impacted by the rising market share of peers in the industry in which it operates.
• Claims Inflation and affordability: nib’s business is exposed to risk arising from rapidly inflated claims costs derived from health service providers.
• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.

Outlook: The company expects that the Payer to Partner (P2P) business strategy would support NHF to navigate the broader challenges and opportunities associated with healthcare. With respect to arhi, the company anticipates net policyholder growth of ~3% for FY22, roll out of new product concepts and return to net margin target of 6-7% in the future. For New Zealand, the company expects net policyholder growth of 3-5% in FY22 and is likely to finish the acquisition of Kiwi Insurance in 2HFY22. The company is optimistic about the outlook of Kiwi business on the back of favourable market conditions. In addition, the company expects the nib travel and International inbound health insurance (iihi) business to become profitable by FY23.

Business Strategy (Source: Analysis by Kalkine Group)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of NHF is trading below its 52-week low-high average of $5.130 - $8.050, respectively. The stock has been corrected by ~5.20% in the past three months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, P/E multiple, considering the COVID-19 uncertainties and other material business risks, etc. For the purpose of valuation, a few peers like Medibank Private Ltd (ASX: MPL), Insurance Australia Group Ltd (ASX: IAG), Steadfast Group Ltd (ASX: SDF), and others have been considered, which comes under Insurance sector. Considering the expected upside in valuation, rising revenue and NPAT, new market expansion, optimistic long-term outlook, and current trading levels, we recommend a ‘Buy’ rating on the stock at the closing price of $6.570, down by ~1.055% as on 21 March 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

NHF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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