Australia | Jun 13 2013
– Stock held hostage by uncertain PHI market
– Broker sentiment mixed
– Growth to slow near term on uncertainty
– Longer term prospects strong
By Andrew Nelson
At first look, private health insurer NIB Holdings ((NHF)) is a real head-scratcher. Broker recommendations run the gamut between Buy, Sell and Hold, with analysts wary about the currently uncertain regulatory direction of the Australian Private Health Insurance industry.
A new broker has joined the fray and this one has a pretty clear rationale about the stock and the Reduce call it has initiated coverage with. In a report out yesterday from Japanese investment house Nomura, analysts go so far as to point out that their views are contrary to consensus. The divergence is put down to taking a more cautious stance on earnings, the broker admitting its FY14-15 earnings per share and dividend per share forecasts average 5% and 8% below consensus.
For a company that the broker says is well positioned in an industry that it likes the look of, one wonders why a Reduce call? The answer, in short, is the upside and value that most brokers admit to is seen as being longer term, with a bumpy road to ride before it is fully realised. So really, the divergence amongst brokers and their calls is not one of value, but more of timing.
Nomura expects the Australian private health insurance (PHI) market to deliver long-term growth in the neighbourhood of 8%. This is expected to be delivered on the back of population growth, economic progress and the ongoing shift in the healthcare business away from the public to the private sector.
The broker also sees NIB as being in a unique position, as it is the only listed direct exposure to this market. But that’s the longer-term again.
In the near to mid-term, the broker is not quite so upbeat about the industry. We are in the midst of a PHI public policy wrangle that will likely take years to sort though and for the dust to settle. In the meantime, the PHI industry has a number of obstacles to overcome. The biggest of the obstacles is falling government subsidies.
Adverse policy changes to subsidisation and taxation of PHI have already started to hit the higher earners, which account for around 25% of insured people. Then there are the mooted changes yet to come that the broker thinks could reduce demand amongst lower income earners as well. Together, these issues have the broker expecting to see increased lapse rates and a downgrade to coverage, which will in turn disrupt industry premium growth through FY14-15.
In the past, potential policyholders getting out there and shopping around the PHI market for better cover and lower prices has been a good things for NIB. However, the broker now expects the competition to heat up, with increasingly price-sensitive customers making conditions more difficult.
The broker thinks this environment plays better into the hands of Medibank Private and BUPA given a more seasoned and stickier customer base. iSelect, the largest online broker of PHI in Australia, will also benefit from the increased customer activity and shopping around for better deals.
Nomura believes current consensus estimates are underestimating the near-term growth interruption, with current forecasts for growth in NIB group premiums of 10% over the next two years simply too high. The broker’s own numbers point to under 5% over the next couple of years.
Analysts at Macquarie pointed out mid-May that over the 12-months to March 2013, premium growth in the PHI industry had already come back to 7.5%, although this was offset somewhat by a lift in margins to 5.0%. The broker, at Outperform, was ok with the news, noting core business growth was still steady and will remain supported by regulation and some new business opportunities.
That might be the short to mid-term picture out to FY15, but what does Nomura see after that? The broker sees four main drivers not just for long-term growth, but attractive long-term growth in the Australian PHI industry.
First, you have the prospect of increasing personal wealth levels, thus the macro economic cycle will eventually create a larger, more affluent customer base. Next, Australia has an aging population base, one increasingly reliant on healthcare. Also, as general healthcare costs rise, so will premiums. And the icing on the cake is that Australia is still growing its population base, bringing in new prospective customers every day.
Thus while near-term policy environment is not constructive, Nomura is completely of the view that long-term government strategy seems to favour the continued shift of patients and costs away from the public system and into the private. So even the Federal Government, when it comes down to it, has an interest in supporting the sector.
NIB's continuing expansion outside of its home NSW market should provide an increasing tailwind. Although, Nomura points out that while on paper the group’s new units seem to offer some attractive growth, the broker remains cautious given they are also higher risk strategies when you compare them to core business given a greater reliance on the health of the economic backdrop.
The FNArena Database shows two Buys, one Hold and one Sell aside from the Reduce put out by Nomura. This makes for a positive sentiment read. The consensus price target of $2.27 is close to the current trading price. Nomura is less optimistic, as we have already established, and has a more cautious target of $1.95.
Consensus FY14 EPS growth is pegged at 14%, DPS growth is forecast to run at 7.2%, paying a 4.9% yield and 13.5x FY14 earnings. The multiples are just too much given the tough and somewhat unpredictable couple of years ahead, concludes Nomura, the broker suggesting investors consider waiting for a more attractive entry point.
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