Business Strategy & Outlook
Genworth has a 50-year history in providing lenders mortgage insurance in Australia but has only been listed on the ASX since May 2014. Global U.S.-based insurer Genworth Financial listed it and completely sold out in 2021. Genworth will find it challenging to grow its lenders mortgage insurance, or LMI, business in the face of increased competition. The entrance of Arch Capital Group, and increased tendency of lenders to self-insure, will see Genworth cede further share over time. LMI protects a lender against a potential gap between the outstanding loan amount plus costs and the sale proceeds from the mortgaged property. While it’s the lender who is protected and decides whether to purchase LMI, the premium is paid by the borrower. There’s a low growth in high loan/value ratio, or HLVR, loans, due to low systemwide home loan growth, as well as banks being more risk-averse after the Royal Commission and tightening of lending standards. An economic backdrop where Australians are holding historically high levels of home loan debt, and wage growth is low, makes strong credit growth and a significantly stronger appetite for loans with higher LVRs unlikely.
Management is rolling out optionality for borrowers to pay premiums in monthly installments and paying LMI upfront at a discount (instead of capitalized on the loan). While initiatives such as these are important to address borrower challenges in saving a deposit, they can lead to Genworth earning less on an average policy, and by not receiving premiums upfront, reduces funds available for Genworth’s investment portfolio. Unless Genworth’s larger customers integrate these offerings into their systems, take up will likely be low. In June 2021, Genworth’s largest customer, Commonwealth Bank, issued a request for proposal relating to its LMI requirements. While the agreement was renewed for another three years, it highlighted the risk to the insurer’s outlook given its reliance on Commonwealth Bank. The bank accounts for around 65% of Genworth’s GWP.
Financial Strengths
Genworth is regulated by APRA to maintain a certain prescribed capital level, or PCA. Genworth’s PCA is driven primarily by its LMI concentration risk charge (which is mainly based on its probable maximum loss based on a three-year economic or property downturn of an APRA determined 1-in-200 year severity level) and insurance risk charge (the risk that net insurance liabilities are greater than the value determined by the actuary). Genworth targets a regulatory capital base of 1.40 times-1.60 times its PCA, which it has been consistently above. The PCA as at Sept. 30, 2022, is a healthy 2.04 times. Genworth completed a share buyback of AUD 100 million in June 2022 and in August announced a new AUD 100 million buyback, steps in getting the solvency ratio closer to the board’s target range. With AUD 3.4 billion in cash and investments, and reinsurance covering AUD 800 million of claims above AUD 1.65 billion, hence the insurer has adequate coverage for a severe economic recession.
Bulls Say
- Fiscal and monetary stimulus cushions an economic downturn in Australia, resulting in a rise in delinquencies but allows Genworth to generate excess returns on equity.
- A sound balance sheet provides the capacity to continue to institute capital management initiatives, including special dividends and buying back more shares.
- New product initiatives lead to new customer wins and allow Genworth to negotiate more favorable pricing with customers.
Company Description
Genworth Mortgage Insurance Australia listed on the Australian Securities Exchange in 2014 after its U.S.-based parent, Genworth Financial (NYSE: GNW), sold down its stake. It has since exited. With a history spanning over 50 years, Genworth Australia is a provider of lenders’ mortgage insurance, or LMI, in Australia. In Australia, LMI is predominantly purchased on loans with a loan/value ratio, or LVR, above 80%. LMI protects a lender against a potential loss (gap) between the outstanding loan amount and sale proceeds on a delinquent loan property. LMI does not protect the borrower, however the premium is paid by the borrower. It’s regulated by the Australian Prudential Regulation Authority, or APRA, which requires it to meet minimum regulatory capital requirements.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
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Business Strategy & Outlook
In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and it can be anticipated to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers to focus on redirecting capital toward infrastructure upgrades and higher-margin Montserrat day hospitals is viewed as a positive strategic step. Improvement in systems is key to improving efficiency. Pathology is an increasingly technologically driven service and the company intends to invest in a new laboratory information system, automation, and digitization through to fiscal 2024. However, while the system upgrades as necessary to restore earnings growth, one won’t see the company building an advantage over rival Sonic Healthcare, which is also continuously improving its systems.
Virtually all revenue is earned directly from Medicare via bulk-billing in the pathology and imaging segments. Healius’ organic volume growth in its core pathology segment has typically ranged between 3% and 5% and a similar rate over the 10-year forecast period can be seen. The volume growth is underpinned by population growth, aging demographics, higher incidence of diseases, and wider adoption of preventive diagnostics to manage healthcare costs. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. Pathology has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes. Higher testing volumes result in a lower cost-per-test as labor, equipment, leases, transportation, and overhead costs are all leveraged. In 2013, the Australian government placed a freeze on Medicare fee rates but resumed indexation in fiscal 2021 for diagnostic imaging.
Financial Strengths
After divesting its medical centers, Healius boasts significant balance sheet flexibility. While the sale proceeds were used predominantly to retire debt, Healius also returned AUD 200 million to shareholders in the form of share buybacks in calendar 2021. Nonetheless, in the absence of major acquisitions, the net debt/EBITDA to remain under 2.0 times over the forecast period compared with Healius’ leverage target range of 1.7-2.2 times and its debt covenant of 3.5 times. At June 2022, Healius reported AUD 525 million in net debt, representing net debt/EBITDA of 1.0 times pre-AASB 16. Given the material operating leverage in the business, it is prudent for financial leverage to be at a comfortable level given the uncertainty surrounding COVID-19 testing. Following Healius’ improvement program in the near term, the free cash flow prior to dividends is to settle around 96% of net income at midcycle. The high cash conversion affords Healius to maintain the forecast dividend payout ratio of 60%, within Healius’ 50%-70% target range.
Bulls Say
- On top of the base level of COVID-19 testing that is likely to continue, Healius is well-positioned for underlying trends in preventive diagnostic treatments and outpatient care in its day hospitals.
- Simplifying the business via the sale of its medical centers is a positive indicator for the ultimate success of the company’s turnaround.
- Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients, which are typically higher-margin.
Company Description
Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue are almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
