NIB Holdings: Making the most of a supportive environment

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

23 August 2022, 9:00 AM

Sectors Covered:

Insurance, Diversified Financials

• NIB Holdings' (ASX:NHF) group operating profit (A$235m, +15% on the pcp), was +11% above Bloomberg consensus (A$211m).
• In our view, this was a strong result, with a bumper performance in the key ARHI business as expected, and some clear signs of improvement in IHII in 2H22 as COVID travel restrictions ease. Outlook commentary also continues to point to a supportive earnings environment near term.
• We lift our NHF FY23F/FY24F EPS by 15% and 9% reflecting lower ARHI claim expense forecasts and improved IIHI earnings estimates. Our price target is set at (login to view).
• NHF is a quality franchise, but with the stock trading on 19x cyclically high earnings, we see it as close to fair value. HOLD.

Event

NHF’s FY22 result appeared broadly in-line with Bloomberg consensus at both revenue (A$2.8bn, +7% on the pcp) and reported NPAT (A$134m, -17% on the pcp).

However, the reported NPAT result was impacted by negative mark-to-market investment experience, with the group operating profit (A$235m, +15% on the pcp), actually +11% above consensus (A$211m). NHF’s final dividend (11cps) also came in above market expectations (9cps). 

FY23 guidance points to:

1. The current favourable Australian Residents Health Insurance (ARHI) claims environment continuing in 1H23.
2. Further improvement in International Inbound Health Insurance (IIHI) profitability.
3. 3%-4% policyholder growth in ARHI and NZ respectively. 

In our view, this was a strong result, with a bumper performance in the key ARHI business as expected, and some clear signs of improvement in International IIHI in 2H22 as COVID travel restrictions ease.

Outlook commentary also points to a supportive earnings environment continuing near term.

The good

1. The ARHI net profit margin (10.2%) was +50bps on the pcp driven by continued subdued claims expense due to COVID (-3% on the pcp).
2. Solid group top line growth (+8%) came from a broad-based divisional performance (+5%-12% revenue growth in all key divisions, ex Travel where GWP was >+400% on the pcp).
3. IIHI saw a significant positive operating profit (UOP) delta in 2H22 on 2H21 (~+A$6.5m versus -A$7.5m) with COVID impacts easing somewhat as international borders fully open.
4. NHF’s FY22 available capital level improved strongly on the pcp (A$82m vs A$66m).
5. Management believe near term earnings risks for ARHI “likely remains to the upside” on healthcare treatments being put off due to the pandemic.

The bad

1. FY22 net investment income (-A$30m versus +A$52m in the pcp) was heavily impacted by unrealised investment losses.
2. The ARHI Management Expense Ratio (MER) rose on the pcp (10.7% vs 10.3%) due to higher marketing spend stemming from increased growth investment and a brand refresh.
3. New Zealand UOP (A$23m) declined 6% on the pcp due to increased claims inflation.
4. NIB Travel remains unprofitable despite losses narrowing (FY22 ~-A$7.5m versus ~-A$13.5m in the pcp).

Investment view

We lift our NHF FY23F/FY24F EPS by 15% and +9% respectively reflecting lower ARHI claim expense forecasts and improved IIHI earnings estimates. Our price target is set at (login to view). NHF is well-run company and the near term operating environment seems broadly favourable.

However, it remains difficult to know how long claims tailwinds (linked to COVID) will support ARHI super profits with the environment to normalise at some point.

With ARHI earnings at cyclical highs and visibility somewhat difficult, we see NHF’s ~19x FY22F PE multiple as fair value. HOLD.

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