Hapvida (HAPV3): Shares are up 17% with signs of a turnaround in the second quarter, bolstering optimism;  BofA recommends

Hapvida (HAPV3): Shares are up 17% with signs of a turnaround in the second quarter, bolstering optimism; BofA recommends

Share of health plan operator Hapvida (HAPV3) saw strong sentiment in the stock market in the post-earnings sessions. After the release of first-quarter results for 2022, in May, shares fell about 17%, with analysts seeing the numbers as disappointing, weak and still not showing the positive impact of acquisitions (Nore Dame, notably).

However, in this post Q2 2022 reveal, the story is quite different. Shares of HAPV3 jumped 16.97% to R$7.72 after revealing data between April and June of this year.

Rafael Barros, an analyst at XP, highlights that the company delivered positive results in the second quarter of ’22, with an adjusted net income of R$241 million, but with the biggest positive achievements for net additions of 139,000 health plans and a 2.6 percentage point reduction. (r) In the loss ratio in the quarterly comparison.

Bank of America raised the asset’s recommendation from neutral to buy after the balance sheet. Analysts noted that strong results for the quarter boosted confidence after a “long winter,” as late data and claims in opposite directions with peers showed the strength of the business model.

The net additions to the health plans portfolio reflected the negative trend observed in the recent earnings releases, as it included 529 thousand total additions, 11 thousand contract reductions and 379 thousand cancellations. “In addition, it is worth noting that the acquisitions of HB, Smile, and Plamed are not yet closed, and should add another 209,000 beneficiaries to the company’s health plans portfolio,” Barros notes.

The cash loss rate decreased 3.5 points in the annual comparison on a pro forma basis (-2.6 points on a quarterly basis), to 72.3%. According to the company, the loss ratio was affected by some one-off events with a total impact of 3.9 pages: (1) 1 part of Covid-19 related costs, (2) 1.9 part of the higher loss ratio earned. corporations, and (3) 1 portion of the negative adjustment price for individual plans.

“In our opinion, the impact related to the acquisitions may persist on Hapvida’s results, delaying the return of the company’s loss ratio to historical levels,” assesses XP.

On the downside, expenses are up compared to revenue (both on an annual and quarterly basis), due in part to the merger between Hapvida and NotreDame.

Itaú BBA highlights the growth of Hapvida’s beneficiary base once again, with better trends in organic additions along with revenue synergies already recorded. The loss ratio, which fell significantly in a quarter in which the profitability of all other operators deteriorated due to the restoration of voluntary procedures, evidences, in the view of analysts, the cost-efficiency of the vertical model.

Credit Suisse confirms that Hapvida showed the first signs of recovery in organic growth with the net additions data. However, analysts note that gross margin remains under pressure, as tickets are below inflation, while costs and expenses are evolving.

“In this context, our analysts believe that it may take a few quarters for claims ratios to reverse, as they depend on ticket adjustments to compensate for claims under pressure from inflation and benefit,” he assesses.

On the other hand, analysts point out that the competition may lose steam as the industry has been operating at low margins for some time.

“Some competitors are already showing signs of weakness, failing to meet capital requirements (eg Unimed Rio). As such, Hapvida is well positioned to win customers and win tickets back. The company has significant financial strength in a structured sector, and vertical integration allows it to sustainably compete for Low tickets, an advantage that cannot be easily replicated,” the credit points out.

After the results, market analysts reiterated the stock’s positive recommendation.

“We expect that in the coming quarters both net additions and average tickets will gain strength, the loss percentage will decrease and the synergies from the merger between Hapvida and GNDI will begin to emerge, leading to improved results. Therefore, our business vision is positive based on the mid-term perspectives,” XP highlights. On a conference call, Hapvida executives highlighted the full average ticket recovery, which should occur between the fourth quarter of this year and the first of 2023.

The credit has an outperforming recommendation (above average market performance, equivalent to buying) for HAPV3 with a target price of R$9.50, or a potential upside of 44% over the previous day’s close. Itaú BBA’s stock recommendation is also outperforming, with a target price of R$10 (possibility of upgrading 51.5% from Thursday’s closing price). BofA, now also with a buy recommendation, has a target price of R$10 for the asset.

Famous indicators

Erlao Machado, co-chairman of Hapvida, celebrated improvements in several of the company’s financial indicators on a conference call with analysts on its 2Q22 results. The data on Covid-19 is a good thermometer to show the safe path the company appears to be walking.

The company stated, for example, that the loss ratio related to Covid decreased in the second quarter of ’22. Expenses with the so-called cost of Covid-19 amounted to R$63 million, from 3.7% in the first quarter of ’22 to 1% in the second quarter. From 22 claims, due to reduced case complexity, resulting in a significant decrease in hospitalizations.

In the volume of hospitalizations due to the coronavirus, there was a 96.1% decrease in the second quarter of ’22 compared to the second quarter of ’21, when the second wave of the pandemic was at its height. According to the company, there were also lower expenses with people, materials, drugs, location, operation, third-party services in the private network and costs with the approved network in combating Covid-19: R$28.1 million in 2Q22 versus R$153.5 million in Q221.

Reduce the loss rate

Erlao Machado highlighted control over organic growth and the loss ratio in relation to results in the second quarter of 22. Health plan numbers, for example, increased 9.9% over the same period last year. In the same comparison, dental plans advanced 2.2%. Plan cancellations also showed a significant decline, and delinquency is stable.

As for the loss ratio, the decrease to 72.3% is close to the historical level of the company, which is less than 70%. “We are very confident of our way,” he said.

On the conference call, executives also reported on adjustments to health plans that began in May, which, as a result, improved the loss ratio. The accident rate is measured by the relationship between the number of procedures accessed by the user and the amount paid by the HMO. The company stated in a conversation with analysts that 55% of revenue is already guaranteed through April 2023 through these price adjustments.

Machado believes that in the last quarter of the year and the first quarter of 2023, another indicator that will be very close to a reconfiguration is the average ticket. Average ticket was -0.8% on health plans in the second quarter of ’22, compared to the second quarter of ’21, but compared to the first three months of the year, the number was 0.2% better. The company attributes the index, which is still negative, to the fact of economic instability that has been verified in the past two years.

Hapvida is also continuing its integration work with the Notredame Intermédica Group, whose group of businesses closed at the beginning of the year. According to the company, hundreds of initiatives and action plans have already been identified during this period to disseminate best practices and capture synergies between companies.

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