Medibank Private Ltd

MPL details
Slowdown in the volume growth and increasing costs are impacting margins: During H1FY17, Medibank Private Ltd (ASX: MPL) reported that its health insurance premium revenue and NPAT witnessed a subdued growth of 1.2% and 1.9% to $3117 million and $231.9 million, respectively, due to continuous slowdown in private health insurance participation. Operating profit and margins declined due to increased investment in customer initiatives, new IT system amortization, however, it was offset by strong investment income (up to $76.8 million due to higher equity market returns). The company paid $2.6 billion in claims to customers and Management expense ratio (MER) stood at 8.9% in H1FY17. MPL reaffirmed its previously guided Health Insurance operating profit of ~$490 million for FY17.
 

Group Result (Source: Company Reports)
 
The company has declared a fully franked interim dividend of 5.25 cents per share, while this represents a H1FY17 payout ratio of 65.9% of underlying NPAT, and the company remains committed to a full year target payout ratio of 70-80%.
 
Recommendation: The stock price declined by 7.2% over the past one year and rose 8.4% in last six months (as at April 24, 2017). However, the slow volume growth due to competitive business environment and poor customer experience owing to issues associated with implementing a new IT system, might limit the upside. Further, MPL expressed to take a lot of time in rebounding to its historical market share trajectory. We give an “Expensive” recommendation on the stock at current market price of $ 2.87
 

MPL Daily Chart (Source: Thomson Reuters) 

NIB Holdings Ltd

NHF details
Ongoing investments to impact near term profitability: For H1FY17, NIB Holdings Ltd (ASX: NHF) reported a revenue growth of 7.3% to $995.0 million driven by ARHI (Australian Residents Health Insurance) premium revenue of $829.8m (up 6.2%) as it contributes to 83.4% of total group revenue. Group underlying operating profit and statutory operating profit grew by 43.4%, 53.3% to $95.2 million, $90.9 million, respectively on account of strong gross margins led by favorable claims environment. International (inbound) health insurance premium segment witnessed a strong policy holder growth of 14% year on year (yoy), however, revenue from the same segment declined by 13.5% yoy due to non-renewal of a large part of unprofitable student business accounts from 1 March 2016. NIB’s adjacent businesses, which include international (inbound) health insurance (international students and workers), New Zealand and World Nomads Group (WNG) travel insurance businesses contribution to group earnings (UOP) continue to grow by 56.7% yoy to $25.7 million in H1FY17. Australian Residents Health Insurance (ARHI) business reported a net policyholder growth of 2.1% for H1FY17 and led the way as NIB accounted for over half of all industry policyholder during the same period. Company’s ongoing investment in the brand, price competences, customer insight and new partnerships with Qantas and Suncorp reflected in the policy holder’s growth. The ARHI business reported a notable underlying operating profit of $73.0 million (up 41.2%) and expects to achieve better policyholder growth in the H2FY17. However, H2FY17 profitability is not expected to be as strong as in the H1FY17 at the back of higher management expenses (owing to higher investment in growth) and lower net underwriting margin (8.7% in H1FY17 and now expected to be around 5%- 6%). 

Performance Summary (Source: Company Reports)
 
Insurance participation rates are expected to remain steady:Overall private health insurance participation rates are expected to remain steady at ~50% of the population due to relatively weak retail environment with higher discretionary consumer spending. Further, affordability and managing costs are easing the pressure on premiums. For FY17, NIB expects to report an improved underlying operating profit of $140-$150 million (statutory operating profit of $137-$147 million).
 
Recommendation: NHF stock was moved up 36.14% over the past one year (as of April 24, 2017) and currently trading close to its all-time high as well at relatively higher levels to peers (6.15 Price to book value vs Industry 5.82 PBV). Further, the earnings are expected to witness subdued growth going forward due to increasing investments and this will cap any further upside. We give an “Expensive” recommendation on the stock at the current market price of $ 6.00
 

NHF Daily Chart (Source: Thomson Reuters)

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