ANALYST’S NOTE

nib Holdings Limited (NHF) announced FY18 results delivering underlying operating profit (UOP) of $184.8m, an increase of +20.2% on the pcp. Net profit after tax (NPAT) grew +11.1% to $133.5m but missed analyst estimate of $135m which saw NHF’s share price slide by -1.8%.

Statutory earnings per share were up by +8.0% to 29.4cps. Management declared a final dividend of 11cps, increasing the full year dividend for FY18 to 20cps (fully franked), representing a gain of +5.3% on payout ratio of 68.5%. We see nib as having attractive growth avenues through their current JV with Tasly, which would provide an opportunity to sell health insurance in China, however increasing regulatory scrutiny and difficult market conditions in Australia and NZ are likely to have a negative impact on margins and profits in the short term (whilst the long-term investment thesis remains intact). Trading on PE-multiple of 19.7x and yield of 3.2% – maintain Neutral.

• FY19 Guidance. 1. nib anticipates a group UOP of ~$180m and statutory operating profit of ~$159m for FY19. 2. Market conditions in Australian and New Zealand market are expected to be difficult and continue to be affected by macroeconomic factors including affordability and negligible growth in discretionary spending. 3. Arhi segment is expected to deliver organic growth of +3%-4% but management anticipates net margin contraction from 6.9% in FY18 to 5%-6% in FY19. Management expects Federal Opposition’s premium cap proposal to put additional pressure on arhi’s net margins from FY21. 4. nib expects to start selling health insurance in China in collaboration with its JV partner Tasly in 2H19 (subject to regulatory approval). 5. Management noted, “nib is confident that it can navigate its way to meet any additional requirements for regulatory capital while acknowledging the uncertainty around the question.” 6. Management expects dividend payout ratio of 60-70% of NPAT for FY19.
• Australian Residents Health Insurance (arhi)-double digit earnings growth. Arhi business delivered strong growth with premium revenue up +12.1% to $1.9bn (of which +6.5% growth was attributable to GU Health acquisition) and UOP up +22.1% to $130.7m driven by strong organic growth and acquisition of GU Health. Net margin grew by 50bps to 6.9%, driven by lower than expected claims growth (reduction in medical prosthetics claims).

• International students and workers. nib’s international students and workers business revenue increased +24.7% to $93.3m and UOP increased +16.5% to $29.6m while margins fell by 230bps to 31.7% due to intense price competition and integration of GU Health. NHF now covers ~160k international students and workers, and they aim to leverage existing capabilities by launching nib International Student Services (NISS), a service provider for international students beyond Australia which would be ready to make sales in FY19.
• World Nomads Group (WNG). Performed strong, delivering sales growth of +7.3%, with international sales up +16.5%. Gross written premium rose +7.7% to $142m, with UOP up +8.0% to $8.1m driven by international policy sales growth in U.S.
• New Zealand. nib New Zealand delivered a solid result despite the loss of a large corporate group client in 2H17, with the loss reflecting in premium revenue offset by policyholder growth in other channels and premium adjustments. While the business grew net policies by 2.8%, UOP was down slightly by 0.4% to $23.4m, negatively impacted by NZD/AUD exchange rates (on NZD basis the business grew premium revenue by +1.9% and UOP by +3.8%).
• QBE Travel insurance acquisition. Management announced acquisition of QBE Travel on 3 August 2018 for a total consideration of $25m (excluding integration costs of ~$11m) to be funded by existing available capital. Management noted that the acquisition would increase gross written premiums of World Nomads Group by +40% and would consolidate the business’ domestic market position.