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Medibank Profit Result Shows Earnings Deterioration

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

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$8.2 billion.

What is the HY20 result?

  • Total revenue from external customers of A$3,421.5 million, up 2.7% compared with the corresponding period.
  • Net claims expense of A$2,843.2, up 5.6% compared with the corresponding period.
  • Underlying NPAT of A$178.7 million, down 23.2% compared with the corresponding period.
  • Underlying EPS of A6.5 cents, up 23.2% compared with the corresponding period.
  • Interim dividend of A5.8 cents per share (fully franked, unchanged from FY19). This represents a dividend payout ratio of 88% of underlying NPAT.

What are the key drivers of this result?

The key features of the results are as follows:

  • The fall in NPAT reflects that the growth in claim expenses is about twice the growth in revenue. This resulted in the gross margin in the health insurance business to fall to 14.2% in HY20 from 17.2% in HY19.
  • The key driver of claims growth was a 6.4% increase in prostheses cost, which was responsible for 69% of the increase of growth in hospital claims. The growth in prostheses cost is extraordinary given a subdued 1.1% increase in hospital utilisation for the half.
  • Partly offsetting the deterioration in the insurance business is an increase in net investment income (A$38.5 million in HY20 compared with A$4.1 in HY19) and a 9.6% fall in management expenses.

On the positive side, policyholder growth resulted in a net increase of 11,700 resident policyholders in HY20. As a result, Medibank Private increased its market share by 8 basis points.

What is the outlook?

Medibank Private did not provide any specific earnings guidance. However, Medibank Private expects

  • hospital and ancillary utilisation to remain around current levels for the remainder of FY20;
  • approximately 3% underlying claims growth per policy unit for FY20;
  • continued improvements in productivity, resulting in around $10m savings in management expenses in the second half of FY20; and
  • the dividend payout ratio to be at the top end or above the target range of 75% to 85% of underlying NPAT for FY20.

Longer term, Medibank Private’s management provided the following warning to Government about the need for regulatory reform:

We are working hard within our business to address the challenges, but Government and the broader private health industry must play a meaningful role to ensure that additional reforms happen as soon as possible. An absence of reform this year could further deepen the prudential regulator’s concerns regarding the overall sustainability of the industry.

 

What is the market’s reaction?

The market is slightly disappointed with the HY20 result, as reflected in the 1% fall in the Medibank private share price to A$2.95. Medibank Private trades at a forward P/E ratio around 20 and an annual dividend yield of around 4 per cent (fully franked).


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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