Implications of NIB Downgrade

Private health insurer, NIB (ASX Code: NHF) yesterday issued a profit warning, the reason for which the company cited as being "an increase in claims expenses".

In theory, that should read through positively for RHC, to the extent that is could mean strong demand for private hospital capacity.  And presumable some market participants might interpret it as that.

But personally, I think there is far more to being a shareholder in Ramsay than merely as cyclical healthcare play; instead, I reflect on how Ramsay performed over the past few years when the private health insurers reported decidedly benign claims conditions (i.e., implying less buoyant times for private hospital operators).

Private health insurers have, over the past two or three years,  been reporting weaker-than-average rates of claims growth.  Yet, while the growth in EBIT from RHC's Australian business has slowed slightly (the 3-year rolling CAGR to FY2019 was 11%pa, compared to 12.8%pa historically), at 11%pa this is still a strong performance, especially since it is almost exclusively organically driven:




Importantly, the metrics of the business that drive shareholder value, namely margins and returns on capital, continue to trend higher despite the theoretical headwind that existed from the weak demand proxy of soft claims:




(Note: No segmental Asset figures were provided by the company for the period from 2011 to 2013.)


So, clearly, this is a very robust and high-quality growth business (well, the Australian business - which compromises 55% of total group revenue and 75% of group EBIT certainly is)

But, as goes the adage, "Quality is what you buy; value is what you get"; so, on the all-important subject of valuation, following the strong share price performance over the past 12 months (up ~35%, compared to the market's 20% increase), the stock is no longer fundamentally undervalued, I don't believe, being on around 25x P/E and 12x EV/EBITDA.

It's going to take two or three years of earnings growth to chew down those valuation multiples back to undervalued territory.   But one thing is for certain, the chance of that earnings growth not occurring, is virtually zero.