NHF Details

In trouble for a deceptive conduct:NIB Holdings Ltd.’s (ASX: NHF) stock plunged by 4.6% on May 30, 2017. The Australian Competition and Consumer Commission (ACCC) has indicated to institute proceedings in the Federal Court against NIB’s Australian resident’s health fund, primarily in relation to a suspected failure in August 2015 to communicate to customers about limited changes made to its MediGap Scheme. Particularly, NIB failed to warn customers in advance that it had removed few procedures from its MediGap Scheme. One of the objectives behind the limited changes made to MediGap related to improved clinical practice. MediGap is a scheme in which doctors and other in-hospital medical providers can elect to receive a higher level of fee reimbursement subject to there being no “out of pocket” expense for the patient. On the other hand, NIB has rejected the allegations put up by the ACCC, and stated that the group worked collaboratively with the ACCC throughout its investigation and has already taken steps to address many ACCC concerns.
 
Outperforming industry policy holder growth in ARHI:During H1FY17, NIB Holdings revenue grew by 7.3% year on year (yoy) to $995.0 million, while NPAT grew by 65.0% to $71.1 million, led by core Australian Residents Health Insurance (ARHI) with net policyholder growth of 2.1% yoy against industry average of 0.3% yoy for the six months. Group underlying operating profit and statutory operating profit reported 43.4% and 53.3% yoy growth, respectively, at $95.21 million and $90.9 million. The first half result was impacted by investment to expand into new markets, currency fluctuations (impacting sales particularly in the UK) and soft domestic sales. The company’s business is naturally very sensitive to the pressure upon private health insurance affordability; hence, the group is determined to improve business and market efficiency by ramping up investment in organic growth across sales channels in H2FY17, which will impact near term profit. Further, the company has announced 4.48% average premium increase, which was the lowest in 14 years and below the industry average. During H1FY17, NIB’s adjacent businesses, which include international (inbound) health insurance (international students and workers), nib New Zealand and World Nomads Group (WNG) travel insurance, continue to grow their contribution to group earnings. International inbound health insurance operating profit reported a robust growth of 150% to $13.3 million, while operating profit from New Zealand business increased by 39.7% to $10.9 million. However, the acquired Specialist travel insurance distributor WNG (acquired in July 2016) posted a decline in operating profit at $3.1 million against $4.23 million in H1FY16. NIB expects underlying operating profit of $140 million to $150 million (statutory operating profit of $137 million to $147 million) for FY17.
 
Declining tax revenue to weigh on government healthcare expenditure:The company expects the overall private health insurance participation rates to remain steady at ~50% of the population with a relatively weak retail environment and high competition for discretionary consumer spending. Further, rising healthcare spending and an increasing ratio of taxpayers to be retired is leading to a situation short of taxes to fund ‘free’ healthcare.
 
Recommendation: The stock moved up by 18.5% over the past twelve months, while it was down 11% in last one month (as on May 30, 2017). The net margins in the sector have also witnessed a blow recently. Given the prevailing uncertainty and risks, we give an “Expensive” recommendation on the stock at the current market price of $ 5.14
 

NHF Daily Chart (Source: Thomson Reuters)

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