March 25, 2023

Hapvida (HAPV3): After a 43% drop in a week, the stock is down this Tuesday with a “new bump”

After a 43.6% drop last week, with a strong reaction to Q4 2022 (4Q22) results, Hapvida (HAPV3) shares had a slight rebound the day before (up 1.49%), but they’ve had another day of… Jingle on the stock exchange. At 2:30pm (Brasilia time) this Tuesday (7), the asset is down 5.51% to R$2.57, after a minimum of R$2.48 per day (down 8.82%).

Among the letters from analysts who note that action has already fallen significantly and those who see few catalysts for recovery, the other piece of news was a blow to the company.

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The National Health Agency (ANS) released its monthly data on health plan beneficiaries the day before, making another negative note to Hapvida, showing a drop of 46,000 beneficiaries (lives) in January, the worst performance in the sector.

Hapvida delivered net losses in both Hapvida and GNDI operators (-30K and -16K, respectively), with the company’s operators delivering numbers below the average for the markets in which they operate.

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Among other insights into the health sector in general, XP points out, the corporate plans sector, which for several months was the main source of growth in the sector, and was responsible for more than half of the total net losses in this period; Medical cooperatives resisted falls during the month; SP and RJ were the two areas that suffered the largest net losses, while MG had a slightly positive performance; Finally, Unimed Curitiba, Unimed Seguros and CNU present the best offers in the first month of 2023.

“Overall, we reiterate our cautious view regarding growth prospects in the health market and note that HapVida could face another challenging quarter ahead,” says Rafael Barros and Rafael Elage, analysts at XP.

This is happening in the context of normal growth below market consensus estimates in the fourth quarter, no signs of improvement in the loss ratio on the radar and the financial result still hurting bottom line, which even led to a stock recommendation downgrade by Credit Suisse soon. After the fourth quarter balance sheet.

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Combined cash claims remained stable in the quarter at 72.9% (-0.1 percentage point compared to Q3 ’22, but up 1.8 percentage point year-on-year on initial), mainly affected by a 2% increase in claims per member in the quarter (+8%). year-over-year), which offset the 3% quarterly growth in average ticket. Hapvida said the disappointing cash loss ratio mainly reflects medical reluctance.

In this context, according to information from Valor Econômico, Hapvida offers two non-strategic assets for sale – Resgate São Francisco, which transports patients, and the technology company Maida.

The assets for sale aren’t highly valuable, given the size of Hapvida, one of the largest health plan operators in Brazil, but they do provide an important signal that the health company wants to strive for greater financial efficiency. The newspaper also noted that the company was also going to talk to restructuring firm G5.

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In a report after speaking to investors in the sector, Morgan Stanley also noted that the risk of raising capital is part of the controversy.

Investors have raised concerns about Hapvida’s need for regulatory capital at the holding company level, given its current high leverage, high medical loss ratio (MLR) and complex holding structure. Although raising capital did not appear to be the primary case for investors, there were discussions about the cost of Hapvida’s financing and capital needs throughout the year if cash burn remains high and NotreDame’s complex structure does not allow profits to flow into the holding company.

There are also questions about the ability of the controlling family to inject capital into the company.

According to Morgan (who has spoken to more than 20 investors about the sector), pessimists still suspect that loss ratio compression may not be cyclical, but rather structural, leading to potential balance sheet problems.

For US bank analysts, 2023 will be bad for the sector, and it’s cyclical. Macro normalization (employment, inflation, interest rates) and post Covid normalization scenarios will impact volume (organic and inorganic), prices (fight for market share), margins and especially EPS. Still, the market should revise estimates downward, especially after a weak delivery of organic growth since the IPO.

Morgan analysts agree that revisions to current premiums may not be able to cover higher-than-expected plan utilization in a very slow market.

Some questions about aligning operational delivery with rewards and management communications are also on the radar. “In our view, current loss ratio levels are unsustainable for the sector and, therefore, should improve for the sector as a whole at some point, primarily as interest rates normalize (now Ebitda arbitrage, or EBITDA, is negative),” the analysts noted.

For them, higher plan utilization after the period of larger restrictions due to Covid is a global issue and seasonality should also lead to some recovery (4Q tends to have a high seasonal loss ratio, 1Q lower). On the other hand, investors are concerned about the impact of the base salary for nurses on the company and the current government’s regulatory risks to higher personnel prices.

Morgan analysts continue to have a positive view of the measure, maintaining the recommendation overweight (exposure above market average) and target price R$7.50 (176% upside potential).

It may take some time to recover, but Hapvida may be too cheap to ignore. In our opinion, even considering potential story risks, including the impact of minimum nursing pay and a slow recovery, all of this appears to have been over-priced (…) We agree the year will be slow and recovery from margins may not It lived up to market expectations, but we see the stock’s current levels as an entry opportunity,” they say.

But for BTG Pactual, which also has a Buy rating on the stock with a price target of R$7.50, Hapvida investors, despite seeing that the company has many competitive advantages, will not turn a blind eye to the recent disappointing results, which means that this lack of confidence In the investment thesis is likely to continue in the coming months.

According to aggregation by Refinitiv, of the thirteen houses covering the stock, nine still have a Buy rating, while four have a Neutral recommendation for HAPV3 assets.