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NIB Holdings Limited vs Medibank Private Ltd: Which one to go for?

September 28, 2015 | Team Kalkine
NIB Holdings Limited vs Medibank Private Ltd: Which one to go for?

NIB Holdings Limited (ASX: NHF)


 
The highlights of the group summary for FY 2015 show a gross operating profit up by 13% to $ 81.7 million and group premium revenue up by 9.6% to $ 1.6 billion. Australian Resident Health Insurance (arhi) operating profit was up by 26% to $ 71.8 million with net policyholders growing by 4.7% against the industry average of 2.5%, premium revenue growth of 8.8% to $ 1.4 billion compared to the industry average of 7.3% and net underwriting margin of 5% compared to 4.2% in the previous year and the industry average of 4.4%. Non- arhi accounted for 12.1% of operating profit compared to 21.1% in the previous year. International (Inbound) Health Insurance (Students and Workers) showed a combined operating profit of $ 11.8 million up 4% over the previous year. NIB New Zealand operating profit was down from $ 7.4 million in the previous year to $ 5.4 million because of legacy Premium Payback product liability and one-off costs but net policyholders grew by 5.9%. Other insurance commissions (non-underwritten) came to $ 2.4 million compared to $ 2.2 million in the previous year. NIB Options showed a net operating loss of $ 3.8 million compared to $ 2.5 million in the previous year. Net investment income was up 5.8% to $ 31.4 million including profit on sale of holding in Pacific Smiles Group of $ 5.4 million. NPAT was up 7.9% to $ 75.3 million and EPS by 8.8% to 17 cents per share. The fully franked final dividend of 11.5 cents per share (compared to 11 cents per share in the previous year) represented a payout ratio of 67% of NPAT. The acquisition of the travel insurance provider World Nomads Group (WNG) was completed on 31 July 2015.
 

Group Premium Revenue and Operating Profit (Source: Company Reports)

The gearing ratio as at 30 June 2015 (defined as debt to debt + equity) was 15.6%. Post the WNG acquisition, the gearing has moved to 32%. The company targets a long-term average gearing ratio of 30% but, in the event of a significant transaction, the gearing may go up above 30% to facilitate the completion of the transaction. The net investment return was 5.8% compared to 5.6% in the previous year and FY 2015 benefited from the sale of shareholding in Pacific Smiles Group. Excluding this benefit, the return on investment would have been 4.8% reflecting the lower cash rate environment. The consolidated defensive/growth split was 83% versus 17%. The total net investment assets as at 30 June 2015 was $ 600.8 million including the Newcastle office building where negotiations are on for a potential sale and multi-year leaseback.


Dividends and Net Promoter Score  (Source: Company Reports)
 
In FY 2016, the company expects above system arhi policyholder growth with stable net profit margins as well as International (Inbound) Health Insurance Policy growth though profits may be weaker. Options operating loss will be similar to FY 2015 but profitability is expected in FY 2017. New Zealand will show policyholder and profitability growth and an underlying net profit of at least $ 10 million is expected from WNG. The statutory operating profit is expected to be in the region of $ 80 million-$ 90 million and the ordinary dividend payout will be in the range of 60% to 70% of NPAT.
 
Despite the many attractions of the stock but given the recent headwinds on the ASX and others performing a little better at competitive prices, we consider NHF to be expensive at current price of $3.28 in relation to the upside that investors can expect.


NHF Daily Chart (Source: Thomson Reuters)
 

Medibank Private Ltd (ASX: MPL)


 
The company announced results for FY 2015 ahead of the prospectus earnings forecast after having paid record health benefits for its members. The pro forma group NPAT of $ 291.8 million was 13% ahead of the prospectus forecast and up 12.9% over the previous year. The inaugural dividend of 5.3 cents per share fully franked was also ahead of the prospectus forecast. In health insurance, a record $ 5.1 billion was paid out in member benefits and the 33.8% increase in operating profits reflects the management focus on improved claim management processes and the improvements in management expenses. Premium revenue growth of 5.1% was lower than the prospectus forecast because of the impact in cover reductions and the change to the sales mix. Gross margin improved to 14.2% while the management expense ratio was down to 8.6%. Investment income came to $ 93.8 million which was ahead of the prospectus forecast.



Net Claims Expense (Source: Company Reports)

The pro forma group NPAT was up 12.9% to $ 291.8 million primarily because of the improved operating profits from the health insurance business. Statutory group NPAT was up to $ 285.3 million from $ 130.8 million in the previous year which was impacted by $ 121 million post tax of non-recurring impairment and reorganisation charges.
 
Health insurance operating profit grew by 33.8% to $ 329.3 million with operating margin rising from 4.4% to 5.5% reflecting the focus on claims management and management expenses. Health insurance premium revenue was up 5.1% to $ 5.93 billion which was below the prospectus forecast. Gross margins increased from 13.5% to 14.2% and the results also benefited from a better claims outcome than was provided for in the claims provision for FY 2014. Management expenses were down 1.1% to $ 512.6 million and the MER of 8.6% was down from 9.2% in the previous year.
 

Forecast, Guidance and Result (Source: Company Reports)

Complementary services revenues declined by 10.7% to $ 641.2 million and operating profit declined by 57.7% reflecting the nonrenewal of the Immigration Contract. The strategy review has now been completed and management is focused on driving further performance improvements in FY 2016. Investment income at $93.6 million was ahead of the prospectus forecast of $ 89.7 million due to favourable currency movements. The revised strategic allocation was implemented during this period which increased the strategic allocation to growth assets from 17% to 25%.
 
The outlook for the health insurance business is a premium revenue growth target in excess of 5.5% in FY 2016, management expense ratio target of 8.3% in FY 2016 and below 8% in FY 2017, and a health insurance operating profit target of more than $ 370 million in FY 2016.

 
MPL Daily Report (Source: Thomson Reuters)

We believe that the company is in a powerful position because of its 30% market share and that the present market price presents a favourable buying opportunity. Accordingly, we would rate the stock as a Buy at the current price of $2.42.
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