NIB Holdings: Kiwi Insurance Limited acquisition

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
09 November 2021, 9:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • NIB Holdings (ASX:NHF) has announced the purchase of 100% of the shares in Kiwi Insurance Limited (KIL) for a total consideration of A$43m (NZ$45m).
  • This is obviously only a small acquisition, with KIL having FY21 NPAT of ~NZ$2.5m (FY20 ~NZ$0.4m). The price is about 18x FY21 earnings with NHF trading on about ~22x. 
  • We make relatively nominal earnings changes to future years (<+1%). Our price target increases slightly to (login to view).
  • NHF is a well-run company, however, it’s hard to know how long claims tailwinds (linked to COVID-19) will support ARHI super profits with the environment to normalise at some point. With ARHI earnings arguably at cyclical highs and earnings visibility somewhat difficult, we see NHF’s ~22x FY22F PE multiple as fair value. Hold.

Event

NHF has announced the purchase of 100% of the shares in Kiwi Insurance Limited (KIL) for a total consideration of A$43m (NZ$45m). The acquisition is subject to receipt of regulatory approvals and is targeted for completion in early 2022.

KIL was established in 2002 and offers NZ life and living insurance products and services through Kiwibank. The acquisition will see NHF acquire around 34,000 new members.

Under the transaction, Nib NZ will acquire KIL and will also enter an exclusive relationship with Kiwibank (a wholly owned subsidiary of Kiwi Group Holdings Limited) which will see the bank refer its retail customers to NIB for their life and living insurance needs.

The rationale for the acquisition is people in NZ typically purchase life, living and health insurance policies as a package. NHF believes a more comprehensive and integrated product set should enhance market penetration in both health and life products and lift revenues.

NHF will fund the transaction through a combination of existing capital and new debt. The transaction on completion is expected to be accretive to earnings per share, excluding one-off transaction costs (forecast to be approximately NZ$8 million).

Analysis

This is obviously only a small acquisition. KIL’s financial accounts show the business produced NZ$12m of net premium income in FY21, and had an FY21 NPAT of ~NZ$2.5m (FY20 ~NZ$0.4m). So the price is about 18x FY21 earnings with NHF trading on about 22x, and, as mentioned, the deal is expected to be accretive on completion.

Whilst this is only a small bolt-on deal, we think NHF’s NZ performance over time has been somewhat patchy. While NHF’s FY21 NZ revenues were 30% higher than the FY18 level, NZ operating profits have broadly stagnated over time tracking at a low A$20m level.

Forecast and valuation update

We make relatively nominal NHF earnings changes to future years (<+1%). Our price target increases marginally to (login to view).

Investment view

NHF is a well-run company, however, it’s hard to know how long claims tailwinds (linked to COVID-19) will support ARHI super profits with the environment to normalise at some point.

With ARHI earnings arguably at cyclical highs and earnings visibility somewhat difficult, we see NHF’s ~22x FY22F PE multiple as fair value. Hold.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


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