Investment Thesis:
- Increased demand for health care services due to ageing population of Australia, thereby contributing increased dependence on private health care insurers. NHF offers exposure to the business model of providing a funding mechanism for the high-growth health care sector.
- Healthcare expenditure is expected to rise by 5-10% per annum, so government cannot offer healthcare services to people without increase in tax.
- The average premium rates increased at the rate of 5 – 6% per annum.
- Policyholder growth and exposure to speed up the investments, NHF is expected to offer double-digit growth in medium term.
- Strong members in management.
- Chalking out budget plan, which improves the company’s expense ratio.
- PHI (Protected Health Information) is promoted by giving incentives and benefits.
- Joining with Tasly Holdings (Chinese Pharmaceutical Company) in Joint Venture and making international presence through the same.
Key Risks:
- Increase in competition among top 6 players
- Putting policy growth targets at risk
- Marketing expenses are anticipated to go high, thereby straining earnings growth.
- Unexpected decline in policyholders in spite of providing incentives
- Rapid increase in healthcare spending and health services demand from people have left Australian Government struggling.
- Registered health insurance firms are unable to increase premium rates without prior approval from the Government/Minister for Health/PHIAC/APRA. Because of this, NHF’s ROE and margins would be exposed to political process and pressures if the company makes large profits.
- Regulatory changes including tax incentives and benefits which encourage take up of PHI.
- Due to poor insurance policy design, aging population, and costs of new medical equipment, procedures and treatments; lapse rates and claims inflation would be higher than expected.
- Negotiations not done rightly with healthcare providers (private hospital operators) which may result into unfavorable contractual terms;
- Investment returns might be lower than expected.
Key Highlights:
- nib holdings Ltd. (NHF) reported strong FY21 results in spite of Covid-19, however it was in line with management expectations
- Revenue grew by +2.9% to $2.6bn and Group operating profit (UOP) of $204.9m, which is up by 39.5%
- NPAT of $160.5m was mainly driven by net investment income of $51.8m.
- Statutory EPS of 35.2 cents, which was +82.4% higher.
- ROIC of 19.1% which was similar to pre-pandemic levels.
- Final dividend of 14cps fully franked (up from 4 cents), which brings the full year dividend to 24cps.
Company Profile:
nib Holdings Limited (NHF) is the Australian private health insurer. NHF operates in four divisions which are private health insurance, life insurance, travel insurance and related health care activities.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- Ultrasound disinfection is required. To avoid cross-infection, ultrasound transducers must be disinfected between patients. Trophon EPR outperforms traditional methods (soak, spray, wipe, or other manual reprocessing/disinfection methods). Traditional soaking, for example, takes 25 minutes, whereas Trophon disinfects ultrasound probes in 7-8 minutes.
- Potential addressable installed base of 120,000 Trophon EPR units worldwide (40,000 each in the US, Europe, and the Rest of the World).
- Higher level disinfection required to reinforce the drive path for new guidelines and regulations. New Guidelines in Australia and New Zealand for example, establish Trophon as the gold standard in high-level disinfection.
- Trophon become standard of care and direct sales team driven for strong adoption as its continuous growing in North America.
- With the demand for safety inventory, GE Healthcare has retained a large and credible distribution partner.
- In the United Kingdom, the Managed Equipment Service (MES) business model is overcoming client capital budget constraints.
- Progress is being made in terms of geographic expansion.
- A strong balance sheet will help to support the growth strategy.
Key Risks
- Increased competition as new entrance entered the market.
- Non-receptive markets where NAN’s product is regarded as excessive when compared to traditional disinfection methods such as using sterile wipes.
- Key customer risk, as one of NAN’s largest customers
- Product flaws or incidents that necessitate recalls.
- Unfavorable foreign currency movements in the AUD/USD.
- Poor R&D execution with no progress.
- Because of the nature of the business, it is prone to quickly reaching a natural penetration rate, where growth becomes subdued.
FY21 results highlights
- Revenue of $103.1m, up +3.0 percent (or +12 percent in constant currency), driven by recovery in 2H21 with revenue of $60.0m, up +39 percent (or +50 percent in CC) compared to 1H21.
- NAN’s global installed base of 26,750 units increased by +13 percent or 3,030 units (with 2H new installed base increasing by +20 percent compared to 1H21 with 1,650 units installed).
- Revenue of $76.4m, up +9% from 1H21 revenue of $42.7m, up +27% from 1H21, driven by a recovery in ultrasound procedure volume to pre-Covid-19 levels.
- Operating profit before tax of $11.0m was -11 percent lower than the $12.4 m pcp, driven by 2H21 profit before tax $10.8m which grew as total revenue increase +39% in 2H21 versus 1H21.
- NAN retained a strong balance sheet position to fund growth initiative with net cash position improving $4.2 to $96.0m.
- Revenue of $26.7 million was down -11 percent, but 2H revenue of $17.3 million was up +84 percent compared to 1H21, with installed base growth recovering and GE Healthcare capital purchases increasing.
- EBIT of $10.8 million fell -7 percent. Operating expenses increased by 12% to $70.8 million, primarily due to $20.3 million in 4Q expenses as NAN returned to its intended investment run rate.
- The $5.9 million in free cash flow was driven by $8.3 million in 2H free cash flow, which offset a $2.4 million net cash outflow in 2H21.
Company Profile
Nanosonics Ltd (NAN) is an ASX-listed company which focuses on developing and commercialising infection control devices. NAN’s first device, the trophon® EPR is a proprietary automated device for low temperature, high level disinfection of ultrasound probes. The device is approved for sale across major markets including, Australia and New Zealand, US, Europe, Japan, Hong Kong, and South Korea. The trophon® EPR is sold through distributors including GE Healthcare, Philips, Samsung, Siemens Toshiba and Miele Professional.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- Stable and sustainable distribution yield.
- Trades on a ~20.7% premium to NTA.
- Strong and experienced management team.
- WES stake in BWP (24.75%) provides security against risk of non-renewal of leases by Bunnings.
- High quality property portfolio with long weighted average lease expiry, strong lease covenants, and high occupancy.
- Low interest rate environment is encouraging for the housing industry and hardware sales however any sudden increase in interest rates provides risk to both revenue and debt financing costs.
- Solid balance sheet with low gearing levels.
- Risk of poor execution in redevelopment of assets vacated by Bunnings to other uses.
Key Risks
We see the following key risks to our investment thesis:
- Any slowdown in demand and net absorption for hardware space.
- Persistent lower inflation (and deflation) affecting retailers.
- Economic conditions affect property fundamentals such as values (cap rates and rental growth), vacancies, retail activity (and hence demand for space at big-box retail sites).
- Risk of non-renewal of leases by Bunnings Group.
BWP Portfolio key Highlights
(1) Occupancy and Rent Reviews: the portfolio was 97.8% leased. According to management, “the rent payable for each leased property is increased annually, either by a fixed percentage or by the CPI, except when a property is due for a market review… During the year, 86 leases in the portfolio had annual fixed or CPI increases, resulting in an average increase of 1.6% in the annual rent for these properties. Sixteen market rent reviews (including 13 Bunnings Warehouse properties) were finalised during the year, with rents broadly in line with the market. The market rent reviews that were due for two Bunnings Warehouses during the year ended 30 June 2020 and 11 during the year ended 30 June 2021 are still being negotiated or are being determined by an independent valuer and remain unresolved”.
(2) Property portfolio revaluations: BWP’s portfolio value increased $151.9m to $2,636.1m in FY21, driven by capex of $16.8m and revaluation gains of $149.2m, less net proceeds from divestments of $15.8m. Net revaluation gain was driven by growth in rental income and an average decrease in capitalisation rates across the portfolio in FY21. BWP’s weighted average capitalisation rate for the portfolio was 5.65% (versus 5.84% in December 2020 and 6.08% in June 2020).
(3) Acquisitions and divestments: BWP made no acquisitions in FY21 but made several offers, with management highlighting “the Trust actively continues to look for value creating opportunities”. BWP also divested its Underwood property in Queensland for $16.0m to an unrelated third party in May 2021. BWP has also entered into an agreement to divest its Mindarie property in Western Australia for $14.5m to an unrelated third party with settlement expected on 30 July 2021.
(4) Developments: in FY21, BWP completed the expansion of the Croydon Bunnings Warehouse, Victoria for $4.0m, which drove an annual rental increase of ~$0.2m. BWP also expanded the Port Melbourne Bunnings Warehouse, Victoria, for $6.6m, driving an annual rental increase of ~$0.4m.
Company Description
BWP Trust (BWP) is a real estate investment trust focused on operating, owning, and divestments and acquisitions of large format retailing properties, in particular, Bunnings Warehouses, leased to Bunnings Group Ltd (‘Bunnings’). Bunnings is the leading retailer of home improvement products in Australia and New Zealand and is a major supplier to builders and trades people in the housing industry. BWP is managed by an external responsible entity, BWP Management Ltd who is paid an annual fee based on the gross assets of BWP. Both Bunnings and BWP Management Ltd are wholly-owned subsidiaries of Wesfarmers (WES), one of Australia’s largest listed companies. WES owns ~24.75% of BWP. Currently, BWP is the largest owner of Bunnings Warehouse sites, with a portfolio of ~80 stores. Eight properties have adjacent retail showrooms leases to other retailers. BWP also owns one stand-alone showroom property. The assets have a current value of ~$2.49bnmillion, WALE of ~4 to 5 years, 97.5% occupancy rate.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.