An earnings accretive acquisition by health insurer NIB Holdings Limited (ASX: NHF) wasn't enough to save the stock from the broader market selloff.
Shares in NIB tumbled 2.9% to $3.37 a share compared to a 0.5% dip by rival Medibank Private Ltd (ASX: MPL) and a 1.8% decline by the S&P / ASX 200 (Index: ^AXJO) (ASX: XJO).
Investors weren't taken by news of NIB's $95 million acquisition of travel insurance distributor World Nomads Group.
Here are seven things you need to know about the transaction:
- NIB claims the deal will be immediately earnings per share (EPS) and return-on-equity (ROE) accretive and the acquisition will be funded from debt and cash reserves.
- World Nomads is the third-largest distributor of travel insurance in Australia and does not underwrite any policies. The company partners with various insurers to offer travel insurance to the public. World Nomads is also exposed to the US, Canada and the UK, which collectively account for 15% of its gross written premiums.
- This is a departure from NIB's traditional business and reflects the urgent need for the health insurer to expand into other related areas as there is little organic growth in its core industry. The travel insurance industry is tipped to achieve a compound annual growth rate (CAGR) of 6% to 2016 and the two largest players account for 58% of the market while World Nomad holds an 11% market share.
- NIB see synergies in the merged group through cost savings and cross-selling of health insurance policies to World Nomads customer base. NIB already sells travel insurance to New Zealand through World Nomads and management believes there is a "cultural fit" between the organisations.
- World Nomads' CAGR for its net profit is 16.9% over the past five years and the company is expected to report a net profit of $5.4 million for 2014-15 compared with consensus forecast for NIB of around $72 million.
- The transaction will lift NIB's debt-to-debt plus equity ratio to 32%, which is a little above the group's target of 30%.
- NIB makes around a quarter of its operating profit from non-Australian resident health insurance. This is expected to rise to over two-thirds after the merger.
I think the acquisition is a positive for NIB as it will give the group another growth lever at a time when organic growth in the domestic health insurance market has stalled.
However, I don't think analysts will make any material changes to NIB's forecast earnings on the back of this and the stock doesn't looks relatively more attractive than Medibank Private.
This is despite the fact that NIB is trading at around a 12.5% discount to Medibank Private on a 2015-16 estimated price-earnings multiple basis. Some discount is warranted in my view given Medibank Private's market leadership position in the health insurance market.
What this means is that both stocks look fair value to me and if you are looking for a better priced alternative, you are better off signing up below for a free report from the Motley Fool on the best dividend stock to own in 2015-16.
