Medibank Private Ltd (ASX: MPL) is Australia’s largest private health insurer, with a market share of around 30 per cent. Its market capitalisation is A$7.8 billion.
What are the key features of the FY20 result?
Medibank’s operating profit was down 12.8% to $461.0 million (from $528.5 million in FY19) and Group NPAT was down 27.9% to $315.6 million (from $437.7 million in FY19). This result reflects a decline in Health Insurance operating profit and the significant fall in investment income partly offset by a rise in operating profit for Medibank Health.
Health Insurance operating profit decreased 13.3% to $470.6 million, with revenue growth of 1.3% more than offset by a 3.2% increase in net claims. As a result, Medibank’s gross margin fell from 17.1% in FY19 to 15.5% in FY20. The low growth in revenue reflects low growth in policyholder numbers (up 0.6%), low premium rate rises in April 2019 and the 6-month postponement of Medibank’s April 2020 premium increase. The increase in claims expense is mainly due to rising hospital costs and alongside a significant reduction in risk equalisation receipts.
Net investment income decreased by $100.4 million to $2.4 million in FY20, due to the negative impact on investment asset valuations across both our growth and defensive portfolios as a result of the heightened market volatility related to COVID-19.
In FY20, Medibank Health revenue from continuing operations increased by 17.2%, or $39.7 million, to $270.0 million, reflecting strong growth across all business lines. Medibank Health operating profit from continuing operations increased by $5.7 million, or 25.8%, to $27.8 million in 2020, with the operating margin up 70 basis points to 10.3%.
Medibank will pay a fully franked dividend of 6.3 cents per share. This makes the total dividend in FY20 12.0 cents per share, which is 8.4% below FY19.
What is the outlook for MPL?
Medibank’s management do not provide any earnings guidance for FY21. However, Medibank is targeting total policyholder growth of greater than 1% (compared with 0.6% in FY20) assuming a flat market. Underlying increase in annualised average net claims expense per policy unit for FY21 is forecast to be broadly in line with FY20. Medibank is targeting $20 million in productivity savings in FY21 and an additional $30 million during FY22-FY23. The dividend payout ratio in FY21 is expected to be towards the top end of the target range of 75%-85%.
More generally, the current economic environment of high and rising unemployment as well as falling household incomes is a major negative for private health insurers including Medibank. This reflects the view that when household budgets are under pressure paying health insurance premiums is something that households can forgo as Medicare is available to them. As an illustration, hospital treatment membership fell by 30,174 persons in the year to June 2020, taking hospital coverage (as a share of population) from 44.3 per cent in June 2019 to 43.6 per cent in June 2020. This falling trend is likely to continue over FY21.
What is the market’s reaction?
The market is slightly disappointed with the FY20 result, as reflected in the 3.5% fall in the Medibank’s share price to A$2.76 (20 August 2020). Medibank trades at a forward P/E ratio around 20x and an annual dividend yield of around 4 per cent (fully franked).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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