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Healthy outlook continues for these moat-rated stocks

Glenn Freeman  |  09 Dec 2016Text size  Decrease  Increase  |  

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These moat-rated insurers continue to perform strongly and present good growth potential in Australia's highly regulated, government-friendly private health insurance sector.


The combination of Australia's ageing demographics, supportive government policies, and ever-increasing healthcare costs mean Medibank Private (ASX: MPL) and NIB (ASX: NHF) remain attractive value stocks.

Despite ongoing speculation around annual premium increases--the latest of which is due to be announced in the coming month--Medibank, Australia's largest private health insurer, and NIB have 1.8 million and 1 million members, respectively.

"Following several years of net customer growth, Medibank experienced a net 2.5 per cent loss of policyholders in fiscal 2016, despite the private health insurance market growing approximately 2 per cent," says David Ellis, senior equity analyst, Morningstar.

However, he believes its stated goal to increase customer satisfaction "will likely see management's target of growing net policyholder numbers in line with market within three years".

More broadly, both insurers benefit from a politically supportive environment, which continues to encourage the private health sector to share the load of an increasingly stretched public health system.

"Various government initiatives designed to shift the cost of healthcare to the private system are already in place, and we believe this will continue into the future, providing a robust platform for growth for the health insurance industry," Ellis says.

That said, he believes earnings per share growth of Medibank should slow in fiscal 2017, following its strong 2016 result and given its planned expenditure of around $35 million on IT upgrades, branch refurbishments and new product investments--though this should turn around again by 2018.

"From fiscal 2018 we expect sold profit growth on the back of a broadly stabilised market share, good premium growth and further improvements in operational efficiency. Good traction in reducing cost growth and reversing the decline in net policyholders should support insurance margins. The balance sheet is strong and remains debt-free," Ellis says.

At Medibank's recent investor day, held at the end of November--the second to be fronted by new group CEO Craig Drummond--he confirmed profit guidance issued at the 2017 annual general meeting of a few weeks earlier.

Among new information, the company provided "some detail on three-year targets ... aiming to keep its private health insurance margins at levels where they are now, which are pretty high when compared to the industry average".

"The same with their return on equity. They reported a very high ROE for 2016 financial year, of 28 per cent, and one of their targets is to retain their market leading ROE, and to keep it above their cost of capital, which is not a hard task," Ellis says.

Drummond also outlined Medibank's three-year target to grow its complimentary services business, as distinct from health insurance, with the aim of doubling this from $25 million to around $50 million by the end of fiscal 2019.

"We think that's pretty aggressive, we've got a target of about a $40-million profit from that division in three years' time. So, overall, the longer-term targets weren't really difficult, but the focus on customer, productivity and reducing their cost growth are all good, and I think over time, the new management will be able to achieve those targets," Ellis says.

NIB Holdings

At NIB, the biggest development of recent times is its white-labelling deal with life and general insurer Suncorp Group (ASX: SUN).

"The Suncorp distribution deal is a positive initiative for [NIB], but it is too early to gauge the financial impact, and at this stage our earnings forecasts and $4.20 per share fair value estimate are unchanged," Ellis says.

He views the expansion of its alliance with Suncorp as a lower-risk strategy than standalone acquisitions, while it also has less upside potential.

Along similar lines as competitor Medibank, profit margins at NIB are expected to decline from the impressive 7 per cent seen in fiscal 2016 to "a still very respectable 6.2 per cent by the end of fiscal 2021".

"Soft market conditions in fiscal 2016 are expected to persist into fiscal 2017, however, management guidance is to deliver policyholder volume growth within the 4 per cent to 5 per cent target range," Ellis says.

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Glenn Freeman is Morningstar's senior editor.

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