Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Capital Markets

We recommend narrow moat-rated <a href="https://www.smartkarma.com/entities/7063" target="_blank" data-smartkarma-citation="entities:7063:1">NIB Holdings Ltd (NHF AU)</a>'s shareholders apply for the full allocation of shares offered in the share purchase plan at the SPP price of AUD 5.65 per share. The SPP price is broadly in line with our upgraded AUD 5.60 per share valuation. We like the private health insurer’s strong track record of consistent earnings growth since initiating coverage in December 2013 with an Accumulate recommendation when the stock was trading at AUD 2.40 per share. Individual shareholders are limited to a maximum investment under the SPP of AUD 5,000, disappointing for all those loyal shareholders who have supported the insurer since demutualisation in 2007. We now expect EPS to grow an average of 10% per year during the next five years (up from an average of 7.7% per year) and our valuation increases 8% to AUD 5.60 from AUD 5.20. The GU Health acquisition accounts for 4% of valuation uplift with a more positive view on NIB’s Australian resident and non-resident private health insurance businesses as well as international travel insurer World Nomads, accounting for 4% of the uplift. NIB stock is broadly fairly valued, trading 6% above our valuation.The GU Health acquisition is good size, not too big to be “transformational,” but if successful should boost EPS by 4%-5% per year long term. Acquisition risk is always a worry, but we are comfortable with NIB’s strategy of modest earnings growth from “bite-size” acquisitions as it diversifies its insurance product range. We are confident NIB’s dynamic growth story can continue, but expect a slowdown in EPS growth compared with the three hectic previous years. Over this period, NIB exceeded our growth forecasts, which in hindsight, we were too conservative as the share price surged. Integrating GU Health into our forecasts boosts premium revenue expectations with average premium growth of 9% per year for the next five compared with average annual growth of 11% for the past five years.Fiscal 2018 financials will include six months of GU Health, with the earnings boost increasing underlying operating profit guidance to at least AUD 155 million up from previous guidance of at least AUD 150 million. Our fiscal 2018 underlying operating profit forecast increases modestly to AUD 158 million, up from our previous forecast of AUD 156 million, with larger annual increases in later years.NIB is an attractive growth stock underpinned by good organic growth opportunities in the core Australian resident health insurance business and recent acquisitions. NIB management appear savvy, acquiring thoughtfully and integrating effectively. The track record provides confidence management will extract targeted synergies of at least AUD 3 million per year once the business is fully integrated. NIB has delivered average EPS growth of 20% per year for the past three years. Groupwide, NIB reported 768,000 health insurance policyholders at June 30, 2017.Going forward, the GU Health acquisition will accelerate NIB’s niche corporate health insurance capabilities with GU Health’s 34,400 policyholders increasing NIB’s combined corporate policyholder numbers to approximately 80,000 in an attractive, high-growth and high-margin segment. Average premium revenue will get a boost as GU Health’s average policyholder revenue of AUD 5,700 per year is materially higher compared with NIB’s average annual policyholder revenue of AUD 3,000.But strong earnings growth delivered from acquisitions increases business risk and we are concerned large “transformational” acquisitions could damage NIB’s strong track record for shareholder returns. NIB’s total shareholder return for the past three years is a very impressive average of 29% per year and over five years, it is 33% per year. We do not expect such strong historical performance to continue, but we remain positive on the earnings outlook.We like the refreshingly frank dialogue from NIB’s CEO Mark Fitzgibbon and especially his views on the remedial action required by the federal government to improve the efficiency and efficacy of the nation’s health system. A series of improvements have been implemented following industry initiatives spearheaded by industry leader Medibank Private with close support from NIB. The fact the major players still have an extensive "wish list" of changes, highlights the efficiencies and imbalances in the private health insurance market in relation to the federal government. The regulatory landscape is changing with significant reform needed to help address rising affordability challenge. A key initiative of the private health insurers has been submissions to the government’s Prosthesis List Advisory Committee where meaningful changes are needed to change prosthesis pricing and to ensure these savings are passed onto consumers through lower annual premium increases.<div class="content-highlight">The biggest disappointment in the acquisition is the acquisition funding strategy, with NIB’s largely retail shareholder base being disadvantaged with a paltry offer of a total AUD 15 million SPP. The AUD 60 million fully underwritten institutional placement was issued at AUD 5.65 per share, a 2% discount to the prior close, accounting for 80% of the new capital raised, with AUD 81 million of the purchase price debt-funded. Small shareholders, those holding 10,000 or less shares, own 70% of NIB and are being offered 20% of the share offer. The deal structure means the backbone of the investor base do not share equitably in the expected accretion from the GU Health acquisition. In our view, this is a poor management decision. NIB will release further SPP details on or about Sept 27, 2017 the same day as the SPP opens for applications. The SPP closes 5.00pm Sydney time Oct. 19, 2017 with allotment scheduled for Oct. 27, 2017.</div>Analyst: David Ellis

We recommend narrow moat-rated NIB Holdings Ltd (NHF AU)'s shareholders apply for the full allocation of shares offered in the share purchase plan at the SPP price of AUD 5.65 per share. The SPP price is broadly in line with our upgraded AUD 5.60 per share valuation. We like the private health insurer’s strong track record of consistent earnings growth since initiating coverage in December 2013 with an Accumulate recommendation when the stock was trading at AUD 2.40 per share. Individual shareholders are limited to a maximum investment under the SPP of AUD 5,000, disappointing for all those loyal shareholders who have supported the insurer since demutualisation in 2007. We now expect EPS to grow an average of 10% per year during the next five years (up from an average of 7.7% per year) and our valuation increases 8% to AUD 5.60 from AUD 5.20. The GU Health acquisition accounts for 4% of valuation uplift with a more positive view on NIB’s Australian resident and non-resident private health insurance businesses as well as international travel insurer World Nomads, accounting for 4% of the uplift. NIB stock is broadly fairly valued, trading 6% above our valuation.The GU Health acquisition is good size, not too big to be “transformational,” but if successful should boost EPS by 4%-5% per year long term. Acquisition risk is always a worry, but we are comfortable with NIB’s strategy of modest earnings growth from “bite-size” acquisitions as it diversifies its insurance product range. We are confident NIB’s dynamic growth story can continue, but expect a slowdown in EPS growth compared with the three hectic previous years. Over this period, NIB exceeded our growth forecasts, which in hindsight, we were too conservative as the share price surged. Integrating GU Health into our forecasts boosts premium revenue expectations with average premium growth of 9% per year for the next five compared with average annual growth of 11% for the past five years.Fiscal 2018 financials will include six months of GU Health, with the earnings boost increasing underlying operating profit guidance to at least AUD 155 million up from previous guidance of at least AUD 150 million. Our fiscal 2018 underlying operating profit forecast increases modestly to AUD 158 million, up from our previous forecast of AUD 156 million, with larger annual increases in later years.NIB is an attractive growth stock underpinned by good organic growth opportunities in the core Australian resident health insurance business and recent acquisitions. NIB management appear savvy, acquiring thoughtfully and integrating effectively. The track record provides confidence management will extract targeted synergies of at least AUD 3 million per year once the business is fully integrated. NIB has delivered average EPS growth of 20% per year for the past three years. Groupwide, NIB reported 768,000 health insurance policyholders at June 30, 2017.Going forward, the GU Health acquisition will accelerate NIB’s niche corporate health insurance capabilities with GU Health’s 34,400 policyholders increasing NIB’s combined corporate policyholder numbers to approximately 80,000 in an attractive, high-growth and high-margin segment. Average premium revenue will get a boost as GU Health’s average policyholder revenue of AUD 5,700 per year is materially higher compared with NIB’s average annual policyholder revenue of AUD 3,000.But strong earnings growth delivered from acquisitions increases business risk and we are concerned large “transformational” acquisitions could damage NIB’s strong track record for shareholder returns. NIB’s total shareholder return for the past three years is a very impressive average of 29% per year and over five years, it is 33% per year. We do not expect such strong historical performance to continue, but we remain positive on the earnings outlook.We like the refreshingly frank dialogue from NIB’s CEO Mark Fitzgibbon and especially his views on the remedial action required by the federal government to improve the efficiency and efficacy of the nation’s health system. A series of improvements have been implemented following industry initiatives spearheaded by industry leader Medibank Private with close support from NIB. The fact the major players still have an extensive "wish list" of changes, highlights the efficiencies and imbalances in the private health insurance market in relation to the federal government. The regulatory landscape is changing with significant reform needed to help address rising affordability challenge. A key initiative of the private health insurers has been submissions to the government’s Prosthesis List Advisory Committee where meaningful changes are needed to change prosthesis pricing and to ensure these savings are passed onto consumers through lower annual premium increases.The biggest disappointment in the acquisition is the acquisition funding strategy, with NIB’s largely retail shareholder base being disadvantaged with a paltry offer of a total AUD 15 million SPP. The AUD 60 million fully underwritten institutional placement was issued at AUD 5.65 per share, a 2% discount to the prior close, accounting for 80% of the new capital raised, with AUD 81 million of the purchase price debt-funded. Small shareholders, those holding 10,000 or less shares, own 70% of NIB and are being offered 20% of the share offer. The deal structure means the backbone of the investor base do not share equitably in the expected accretion from the GU Health acquisition. In our view, this is a poor management decision. NIB will release further SPP details on or about Sept 27, 2017 the same day as the SPP opens for applications. The SPP closes 5.00pm Sydney time Oct. 19, 2017 with allotment scheduled for Oct. 27, 2017.Analyst: David Ellis

Corporate Action: NIB Shareholders Should Apply for SPP in Full. FVE Upgraded 8% to AUD 5.60

nib holdings

Corporate Action: NIB Shareholders Should Apply for SPP in Full. FVE Upgraded 8% to AUD 5.60