Road Less Travelled For Nib?

This story features NIB HOLDINGS LIMITED. For more info SHARE ANALYSIS: NHF

-Debt funded so gearing ramps up
-Outbound travel outlook weakens
-Health insurance outlook softer too
 

By Eva Brocklehurst

Nib Holdings ((NHF)) is diversifying its business. The company will acquire World Nomads, Australia’s third largest travel insurance distributor, for $95m. This is outside its core health insurance offering with the rationale being that travel insurance is similar to health in that it is light on capital requirements, with a short tail and reliant on brand and efficient distribution.

Macquarie considers the acquisition a natural fit for nib Holdings, as it has sold travel insurance since 1990. The company moved its insurance offer to World Nomads from Allianz – Australia’s second largest distributor – late last year. The product has enjoyed an increase in sales since the switch. As the deal has been done to grow revenue rather than remove costs, the synergies on costs are likely to be immaterial, Macquarie maintains. Instead, given its diversified distribution channels, World Nomads is considered a nimble business with a 11% market share and growing strongly. Moreover, the broker observes, while World Nomads does not underwrite policies, 60% of travel insurance claims are medical in nature.

Credit Suisse estimates the acquisition is 3.1% accretive in FY16 and 3.6% in FY17 but at that price does not reach management’s 15% return target. To generate such a return it would require a significant increase in earnings, the broker calculates. Still, the acquisition fits the company’s strategy and provides growth opportunities. The broker has now removed the special dividend from its FY15 forecasts and makes no changes to FY16.

As the share price has underperformed recently, Credit Suisse upgrades to Neutral from Underperform. While expecting the health insurance market will remain challenging the company should be able to gradually expand its margin to reach the low end of its target of 5.0-5.5% in FY16.

There are likely to be few synergies with nib Holdings’ health insurance business, Goldman Sachs maintains, but World Nomads is likely to welcome the better access to capital that will come from being allied with nib Holdings. The broker makes no changes to forecasts and retains a Neutral rating and $3.50 target. Moreover, Goldman Sachs envisages limited implications for market leader CoverMore ((CVO)) from the acquisition, given the number of market participants has not changed. World Nomads has three brands – WorldNomads.com, Travel Insurance Direct and SureSave and sells through online channels.

Deutsche Bank expects the acquisition to add a stable earnings stream with no underwriting risk and minimal capital requirements. The acquisition supports around 4-5% earnings accretion but, with the purchase price largely debt funded, the broker notes this partly reflects a ramp-up in gearing, which rises to 32% from 17%, just above the company’s target range of 25-30%.

While the company believes travel insurance offers strong growth prospects, underpinned by increased affordability of travel and rising global incomes, the broker is not so sure Australia is in that camp. Australia accounts for 70% of World Nomads’ gross written premium. With negligible real wages growth and a falling Australian dollar making overseas holidays less affordable Deutsche Bank envisages some risk of slower earnings growth.

The broker also envisages limited relevance to the company’s core business. Although nib Holdings is likely to still have a $40m surplus post the deal, as gearing moves above its target the capacity for acquisitions is limited. Against a background of slowing sales, rising coverage downgrade and intense competition, the health sector’s growth prospects too may have softened.

Deutsche Bank retains a Hold rating, one of five on FNArena’s database. Macquarie is the odd one out with an Outperform rating. The consensus target is $3.61, suggesting 6.8% upside to the last share price.
 

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