NIB Holdings: Claims tailwinds still driving strong results

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

23 February 2022, 10:30 AM

Sectors Covered:

Insurance, Diversified Financials

• NIB Holdings’ (ASX:NHF) 1H22 NPAT (A$81m) was in-line with our estimates and ~+25% on pcp.
• Overall we saw this result as mirroring recent NHF performances, with a strong result in the key ARHI business, on lower-than-expected claims due to Covid-19, offsetting some Covid-19 linked weaknesses in other businesses (IIHI and travel).
• We make nominal changes to NHF FY22F/FY23F EPS of +2%/-2% on slight alterations to growth and margin assumptions. Our PT is reduced to (login to view).
• We see NHF as a quality franchise, but currently trading at close to fair value on ~20x FY22F PE. HOLD.

Event

NHF’s 1H22 NPAT (A$81m) was in-line with our estimates and ~+25% on pcp. Revenue (A$1.35bn, +8% on pcp) was +4% above our expectations (A$1.31bn), but offset by higher costs and lower other income than we forecast. The 1H22 dividend of 11cps was below our estimates of 12cps.

Overall we saw this result as mirroring recent NHF performances, with a strong result in the key ARHI business, on lower-than-expected claims due to Covid-19, offsetting Covid-19 linked weaknesses in other businesses (IIHI and travel).

The good

1. The ARHI business had another standout result with a net margin of 10.6%, well up on pcp (8.2%), assisted by lower claims as Covid-19 caused delays to private hospital surgeries;
2. ARHI premium revenue growth was a healthy +8% on pcp, driven by solid policyholder growth of ~3%;
3. NZ delivered 14% revenue growth on pcp due to a combination of policyholder growth (4%) and price adjustments for inflation/FX;
4. NHF is guiding to a return to profit for its Covid-19 affected IIHI and travel businesses in FY23;
5. The group ROIC of 20% was well up on pcp (12%); and
6. Group available capital of A$90m is versus A$66m at FY21.

The not so good

1. IIHI is still seeing a challenging environment reflected in a -A$7.4m underlying operating loss, well down at pcp (+A$0.3m) due to Covid-19 driven business mix issues impacting claims;
2. NZ’s underlying operating profit (A$9.2m) was down ~13% on pcp (A$10.5m) due to claims inflation from higher utilisation related to both medical and surgical claims;
3. The travel business is still loss making (- A$7.9m, broadly in-line pcp); and
4. Investment income (A$15m) normalised post a very strong result in the pcp (A$28m).

Changes to forecasts

We make nominal changes to NHF FY22F/FY23F EPS of +2%/-2% on slight alterations to growth and margin assumptions. Our PT is reduced to (login to view).

Price catalysts

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 ~20x FY22F PE multiple as fair value. HOLD.

Risks

Downside risks:

1. Unexpected claims inflation;
2. Potential provision top ups;
3. Slowing rate increases and industry growth pressures;
4. Investment volatility; and
5. Unfavourable government regulation particularly in relation to industry pricing.

Upside risks are largely the opposite.

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