nib holdings limited

Guidance below FY19 UOP on the Face of Prevailed Market Challenges: nib holdings limited (ASX: NHF) is a private health insurer with footprints in New Zealand and Australia. In FY19, its subsidiary, nib Travel Pty Limited acquired QBE’s travel insurance business for a consideration of $24.2 million. NHF recently announced its annual report for FY19. The company announced ordinary fully paid dividend (fully franked) of AUD 0.13000 with ex and payment date of August 27, 2019 and September 30, 2019, respectively. With this, the total declared a fully franked dividend for FY19 stood at 23 cents per share as compared to 20 cents per share in FY18. Total dividend in FY19 represented 70% of FY19 net profit after tax (NPAT), in-line with its targeted dividend payout ratio of 60% to 70% of NPAT.

The group posted decent results for FY19 backed by sound execution of business strategies, member-first focus and capabilities across the entire Organisation. Total Group revenue posted a yoy growth of 8.3% to $2.4 billion, whereas UOP (underlying operating profit) witnessed a rise of 9.2% to $201.8 million during the period. NPAT for FY19 saw a yoy growth of 11.8% to $149.3 million with net investment income of $36.1 million, which grew by 22.0%. Statutory EPS (earnings per share) at 32.9 cents per share saw a yoy growth of 11.9%.

Coming to the reportable segments, its flagship Australian Residents Health Insurance (arhi) business accounted for the bulk of total Group earnings, contributing $149.5 million or 74.1% of the Group UOP. Premium revenue witnessed a yoy growth of 7.6%, driven by policyholder growth, premium adjustments, and full-year contribution of GU Health.


Gross Margin- arhi (Source: Company Reports)

New Zealand Residents Health Insurance saw an uplift of 8.8% in its premium revenue in FY19. Gross margin and net margin declined to 39.7% and 9.2% in FY19 from 42.9% and 11.8%, respectively, a year ago.
 
International (Inbound) Health Insurance (iihi) saw a yoy growth of 19.5% in net policyholders with ~190,000 international student and workers now covered. Premium revenue grew by 18% to $ 110.1 million during the period with claims expenses rising to 15.8%. The segment reported stable margins with gross and net margins at 61.5% and 31.1%, respectively.

nib Travel witnessed a decline of 18.5% in UOP (underlying operating profit) on account of higher acquisition cost related to QBE Travel in fourth quarter and investment in both domestic and international markets.

Outlook & Guidance: The company’s flagship arhi business saw an insurance margin of 7.3% in FY19 on account of relatively lower claims inflation in recent years. Insurance Margin was well above the long run target of 5% to 6%. However, going forward, the Management does not expect such high level of margin to be continued and expects the net margin to be around 6%. Organic net policyholder growth target for arhi for FY20 has been set in the range of 2% to 3% per annum on the face of prevailed challenges in the market. The industry is likely to see further consolidation given a range of factors, including an increased focus from the Australian Prudential Regulation Authority (APRA) upon business sustainability risk. The Management anticipates a Group UOP of at least $200 million and statutory operating profit of at least $180 million for FY20.  Ordinary dividend payout ratio for FY20 is targeted to be in the range of 60% to 70% of NPAT for the full year.


FY20 Guidance (Source: Company Reports)

Stock Recommendation: At the current market price of $7.150, the stock is trading at a price to earnings multiple of 25.520x with an annual dividend yield of 2.75%. The stock has gained 48.44% on YTD and is currently trading slightly towards the higher end of its 52-week trading range of $4.640 - $8.200. The company reported a decent set of numbers for FY19 with arhi posting excellent margins which is unlikely to sustain, moving forward. Considering the challenging market scenario, weakness in consumer discretionary spending, intense competition, the Management has provided guidance for FY20 with a conservative approach. FY20 UOP has been anticipated slightly below the FY19 numbers with lower margins. Hence, with the backdrop of aforesaid facts, we suggest investors to avoid the stock at the current market price of $7.150, down 6.291% on 19 August 2019 on account of lower guidance related to UOP and margins.  

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