Stock Spotlight: nib holdings limited (ASX:NHF)

This week's Stock Spotlight is ASX-listed nib holdings limited.

About nib holdings limited.

nib holdings limited, together with its subsidiaries, engages in the underwriting and distribution of private health, life, and living insurance to residents, international students, and visitors in Australia and New Zealand. The company operates in five segments: Australian Residents Health Insurance, International (Inbound) Health Insurance, New Zealand Insurance, nib Travel, and nib Thrive segments. It is also involved in the sale and distribution of travel and disability insurance products; and provision of health management programs. The company was founded in 1952 and is based in Newcastle, Australia.

Source: Yahoo Finance

Key Stats

Source: Yahoo Finance, ASX. Data as of 26/09/24.

Growth Potential

• Trading below our valuation and on undemanding 2-yr valuation multiples (12.4x PE-multiple / 5.2% dividend yield).
• Given Australia’s growing and ageing population, there will be increased demand for health care services. This will add additional pressure on Australia’s public health care system and the Federal budget and an increased dependence on private health care insurers. NHF offers exposure to the business model of providing a funding mechanism for the high-growth health care sector. Healthcare spending is expected to grow at 5-10% per annum, so without significant tax hikes, the government cannot afford for people to shift back to the public healthcare system.
• Given underlying increases in average premium rates of around 5 - 6% p.a., some policyholder growth (especially at the 30-34-year-old segment), and exposure to upstart investments, we estimate that NHF offers close to double-digit underlying growth in the medium term.
• Solid management team.
• Cost-out strategy which improves the company’s expense ratio.
• Incentives and benefits encourage PHI take-up. They include 1. Tax benefits and penalties for Australian residents (via Lifetime Health Cover, Medicare Levy Surcharge and means tested rebate); and 2. Shorter wait times, a choice of specialist doctor/hospital and coverage of ancillary health services support.
• Growth runways through the JV with Tasly Holdings Group, and also international expansion, through product offerings like NISS.
  

Key Risks

• Intensifying competition between top 6 players, putting policy growth targets at risk and any Increases in expected marketing spend going forward will no doubt add further strain on earnings growth.
• Policyholders decline unexpectedly despite the encouraging incentives and the Australian Government struggling with the rapid increase in healthcare spending and health services demand.
• Registered health insurers cannot increase premium rates without approval from the Government/Minister for Health/PHIAC/APRA. This leaves NHF’s ROE and margins exposed to a political process and pressures if the company is deemed too profitable.
• Regulatory changes especially relating to any changes to tax incentives and benefits which encourage take up of PHI.
• Higher than expected lapse rates and claims inflation as a result of poor insurance policy design, aging population, and costs of new medical equipment, procedures and treatments.
• Poor negotiations with healthcare providers such as private hospital operators leading to unfavourable contractual terms.
• Lower than expected investment returns.