Primary Health Care Confounds Brokers

This story features NIB HOLDINGS LIMITED. For more info SHARE ANALYSIS: NHF

-May be strategic
-No near-term gain
-Diversifies revenue
 

By Eva Brocklehurst

Primary Health Care ((PRY)) has moved into the private health insurance sector, with the acquisition of Transport Health from the Transport Friendly Society for $18m. As part of the transaction, Primary will acquire a Melbourne-based dental facility that serves existing Transport Health members. The insurer is small, with 5,000 members, and generated revenue of $16.3m in FY13 with a net insurance margin of 5.3%.

Primary previously considered expanding into private health insurance, taking a small stake in nib ((NHF)) which it ultimately sold in 2010. The private health insurance market does offer the potential for further consolidation but, based on the current balance sheet and near-term capex requirements, Credit Suisse does not believe now is the appropriate time to be embarking on a more material deployment of capital in this area. In the longer term, legislative changes may allow the coverage of outpatient medical services, such as GP visits and diagnostics, and then Primary Health Care would be well placed to offer these services in order to attract membership.

UBS was confounded by the move, envisaging no absolute connection between general practice and the insurance industry. Taking a longer term view, the broker acknowledges there is potential for greater interplay between the industry and GPs, but Transport Health is a sub-scale entry point in this regard. The broker is also points out that, if Primary can increase membership rates buy selling the fund via its GP channel, this carries risk of overweighting selection of the ill. The broker can only conclude that Primary Health Care will choose to run the fund at a zero margin and engage with its GPs to direct volume and funds into the business, or it may simply be an asset trade. At least the deal is small, so UBS makes no changes to forecasts, retains a Buy rating and awaits further clarification on the metrics.

Citi considers the stock, regardless, is too cheap to ignore and maintains a Buy rating. The earnings impact from such a small acquisition is negligible but Primary Health Care will apply to convert Transport Health to an open-access fund, enabling the development of products and membership growth. Citi also believes the acquisition is strategically sound, as it provides options and avenues to leverage existing medical infrastructure and, in the future, the potential for a cost-efficient integrated delivery network could be of significant value.

Given regulations explicitly prohibit insurance cover for out-patient services, the synergies, in Deutsche Bank's view, come from directing members to Primary Health Care's centres. The deal may prove smart if the sector is de-regulated but at present Deutsche Bank expects the focus to be on providing a low-cost alternative in the relatively crowded health insurance market. From JP Morgan's point of view the acquisition could alleviate some of the funding risk by diversifying revenues away from government reimbursement as growth gets harder to come by. The broker believes the entry into private health insurance highlights the uncertainty inherent in a potential GP co-payment and the risks around growth in the key medical centres business.

The company has pointed out there is potential to achieve better outcomes with hospital operators than is possible through small health insurer buying groups, given Primary Health Care already has contracts for the provision of radiology and pathology services. Nevertheless, operational benefits appear to be a long way off and JP Morgan expects minimal earnings impact for at least two years. With capex on the rise again the broker prefers a Neutral rating.

On FNArena's database ratings include three Buy, four Hold and one Sell. The consensus target price is $4.95, suggesting 10.8% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 4.8% and 5.3% respectively.
 

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