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Date : 25/02/2021

Medibank Limited

ASX :

MPL

Market Cap : $7.85 Billion

Dividend Per Share : $0.058

Dividend Yield : 4.15 %

Hold

52 Week Range : $2.45 - $3.13

Share Price : $2.79

Medibank remains the largest player in an industry that is refusing to grow. However, they are in a position to slowly gain more market share. We recommend members to "Hold"

Company Analysis

Medibank Limited (ASX: MPL) has performed better than the ASX Financials sector (blue line) and has more or less performed similar to the ASX 200 index since September. We added Medibank to our dividend portfolio back in September at a price of $2.58 a share. Today, Medibank trades at $2.80 a share after having returned 8.5% to investors.


Source: Tradingview.com

Medibank is the second largest insurance player in Australia (behind Bupa) and the largest private insurance provider in the country. Medibank’s range of products includes health insurance, life insurance, income protection, travel insurance, pet insurance, and overseas health insurance for international students and work visa holders. They operate under 2 brands: Medibank and ahm.

Ahm is the low-cost private health insurance brand offered by MPL. The insurance industry in Australia was experiencing hard times even before the pandemic. With an ageing population, the claims were always going to go up for Medibank and other players. Recent trends note that the younger generation are not forthcoming towards signing up for private health insurance. This has been a cause for concern for insurance providers – who are lobbying to increase medicare surcharge for wealthy Australians who do not own a private health insurance cover. Ahm – the low-cost brand has been Medibank’s best performer recently with new customer sign-ups.

Since our initial coverage of Medibank there has been a couple of announcements and most recently, their half year earnings announcement for FY2021.

Insurance Premium Increase

In December, the Federal Minister for Health announced that private health insurance premiums will be changing across the industry from the 1st of April 2021 onwards. Medibank received the necessary approvals that are required to increase the premiums for both – Medibank and ahm by an average of 3.25%. This increase however is the lowest average premium increase that Medibank has carried out in the last 20 years. This looks to be a very strategic move by Medibank in order to combat the decline that the industry is going through. Medibank is keeping its premiums low in order to look more attractive to potential customers.

Myhealth Acquisition

Earlier this month, Medibank announced that it has invested in Myhealth Medical Group. The investment strengthens Medibank’s focus on preventive health and doctor led partnerships. Myhealth owns 86 clinics across NSW, Victoria, and Queensland, and it has 3 new clinics that are due to open soon. Myhealth delivers over 2.5 million patient consultations every year with over 1300 health professionals practicing within the Myhealth network.

Medibank acquired a non-controlling 33.4% economic interest in the Myhealth Medical Group. In terms of shares, Medibank acquired 49% shares for $63 million from the cash reserves. The difference between the economic interest and the shares is because of the interests of the management of Myhealth and the local GP still own in Myhealth and its subsidiaries. Myhealth has been growing by over 10 clinics every year and the finances can be seen in the below


Source: MPL

D&A is the depreciation and amortisation expenses that will incur as the assets (clinics) of Myhealth continue to grow. The deal is expected to be completed by the 31st of March. This deal certainly diversifies Medibank as a company.

Half Year Earnings – FY2021

Today’s half year earnings report is very positive for Medibank. Along with the result Medibank also announced that their CEO Craig Drummond will be retiring on the 30th of June.

  • Revenues from health insurance premiums increased to $3.3 billion after a 0.4% increase.
  • The Medibank Health revenue increased by 8.1% to $113.3 million.
  • Net investments (investments and divestments) and other income brought in $73.1 million.
  • These inflows resulted in the operating profit increasing by 26.8% to $226.4 million.
  • Net profit for the period grew by 27.3% to $226.4 million.

The ageing population of Australia and the increased awareness around health during Covid19 has increased the demand for insurance. While there is still pressure on the long-term growth prospects in the private insurance industry, it has not bottomed as of yet. The first half of the financial year saw Medibank increase its policyholders by 49,000. While ahm has been the only growing segment for Medibank in the past few years, 17,600 of those policy holders had picked the Medibank brand – the first time since 2013 that the firm has managed to do this. This trend has also continued through January according to the CEO. This growth has increased the ambitions of the firm and they are now known to be targeting policyholder growth of over 3% for the full financial year FY2021.


Source: MPL

Medibank has done fairly well in combating the challenges thrown at them and the insurance industry by the pandemic. Medibank has pushed and increased its customer support, and this has increased their retention. Medibank has reported that retention across both their brands has improved by 30% in the past 12 months.

Health Insurance Segment

The operating profit in the Health Insurance segment increased by 13.6% to $254.6 million. There was a 1.8% reduction in gross claims. Premium revenue increased to $3.3 billion. The cost from the 6-month postponement of premiums and the suspensions of policies during the pandemic put a halt on the premium revenues by $109 million.

After adjusting for policy suspensions and reactivations due to Covid, policyholders number increased by 2.2% during the half year. This is significantly higher than the 0.7% growth Medibank witnessed in the previous corresponding period.

The gross claims expense decreased by 1.8%. and the net claims expense decreased by $24.1 million to $2.8 billion. This includes the $99 million worth of Covid related reductions in claims and risk equalisation payable for the period. Most of the claims were coming in from private hospitals and dental claims. Management expenses increased by $2.7 million or 1.1%. The costs were controlled throughout the period.


Source: MPL

Medibank Health

Medibank Health is the segment that provides health management services. The revenue in this segment was up 13.2% to $145.6 million. The increase in revenue is a result of an increased demand for in-home care and telehealth services. The decrease in demand coming in from the travel insurance partly offset some of the revenues. The operating profit increased to $18.8 million. In comparison, the operating profit from this segment was $13.3 million in the first half of FY2020. The operating margins have improved as well by 260 basis points to 12.9%.

Capital Management

The balance sheet remains strong for Medibank. Health insurance related capital was $9088.6 million at the end of the period. The total investment has increased to $2.1 billion and the cash position has reduced to $606 million due to the acquisition of Myhealth.

Medibank declared a dividend of 5.8 cents a share at a payout ratio of 79% of net profits after tax. The full year dividend expectation is in the range of 75% – 80% of FY2021 NPAT. The decreased dividend may mean that further acquisition may be on the cards for Medibank.

Outlook

The expectation is that Medibank has to increase market share in order to continue growing their EPS. With new growth hard to come by as the insurance industry is structurally not aligned to grow handsomely. The policyholder growth Medibank is targeting for the year is in excess of 3% and a growth of the Medibank brand by close to 1% in expected during the financial year.

Net claims expense per policy is around 2.6% and it is estimated to stay at the same level throughout the second half of the year. Medibank is targeting $20 million in productivity saving and an additional $30 million is planned for the following 2 financial years. Management expenses are expected to be $530 million for FY2021. Acquisitions will remain an area of focus during the next half year as Medibank may look to build on the Myhealth acquisition and to increase both segments – Medibank Health and Health Insurance.

All other analysis remains the same from our previous coverage and the report can be accessed by clicking here.

Recommendation

Medibank’s market position is very good, and they are expected to continue dominating in the space however low the growth is the private insurance industry. They are investing to diversify their business and try and gain some market share by increasing customer support. We recommend members to continue to “Hold” on to their positions as the expectation is that Medibank will perform to meet its full year FY2021 expectations.

 

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