Private health insurer, NIB Holdings Limited (ASX: NHF) has greatly outperformed both the broader S&P/ASX200 (ASX: XJO) (Index: ^AXJO) and rival Medibank Private Ltd (ASX: MPL) since the beginning of 2015.
Source: Google Finance
However, with NIB shares up almost 40% in the past year alone, now may be a good time to consider reducing your exposure.
Here's what you need to know about NIB
NIB is Australia's fifth largest private health insurer with around 8% market share. Currently, 81% of the market is controlled by the five largest providers, with Medibank at the top – who holds 29% market share.
NIB estimates 55% of the population currently have private health insurance, which leaves plenty of scope for further industry expansion.
Recent increases in the Medicare levy, coupled with likely industry changes (such as private health covering appointments with GPs), will prompt more Australians to consider taking out cover.
Since 2008, although now slowing, NIB been able to grow its number of policyholders ahead of the industry whilst also maintaining a strong management expense ratio (MER) of 8.1% and gross margin of 13.4%.
NIB estimates industry growth to be between 2% and 3% in the years ahead, whilst predicting its own policyholder count will increase 4% to 5% per year. That's despite intense competition across the sector.
Premium prices are also expected to increase above inflation and will likely see NIB achieve a net underwriting margin of between 5% and 5.5% in 2016, according to a recent management presentation.
In New Zealand, whilst financial year 2015 profit is expected to be impacted by ongoing investment, the company is committed to building brand awareness organically and hasn't ruled out the possibility of acquisitions.
NIB's push into the tourist and visa markets also provide scope for further growth, with strong margins achieved across the international businesses in 2014.
What about valuation?
In the 2015 financial year, management are expecting single-digit operating profit growth and will pay a dividend equivalent to between 60% and 70% of net profit after tax. Based on this, NIB shares currently trade at a price-earnings ratio of approximately 23 and dividend yield of 2.8% fully franked. This does not appear cheap for a company growing profits at low single digits.
Should you buy?
Whilst NIB has plenty of growth opportunities it can pursue in the years ahead, at current prices, its valuation appears quite stretched. So unless you're prepared to hold shares for the ultra-long-term (10 years or more), it's probably best left out of your portfolio and on your watchlist, for now.
