Medibank Private Limited

ASX :

MPL

Market Cap : $6.995 Billion

52 Week Range : $2.45 - $3.51

Share Price : $2.58

Dividend Per Share : $0.063

Dividend Yield : 4.65 %

Buy

MPL is a stock that we believe is trading lower than what its fundamentals suggest. The firm has a stable dividend payout of 12c and has a strong balance sheet and ride out the covid19 storm.

Company Analysis

Medibank Private Limited (MPL) is an Australian insurance private health insurance provider. It is the second biggest insurance provider in Australia, behind Bupa. MPL has roughly 25% market share in the health insurance industry. Medibank has the below product offerings:

  • Health Insurance
  • Life Insurance
  • Income Protection
  • Travel Insurance
  • Pet Insurance
  • Overseas Health Insurance (International Students)

The firm operates under two 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 performer recently with new customer sign-ups.


Source: Tradingview.com

The stock price reflects just that since the beginning of the year and is now trading close to its 52-week low. Investors can be seen reacting as there was a cause for concern. Covid-19 could not have come at a worse time for the insurance industry in Australia. The claims have gone up even further, and the volatility of the stock has increased.

The firm’s revenues took a 30% hit in FY20 compared to the previous year. As claims increase and profit decline, Medibank is investing in partnering with doctors and investing in private medical facilities with an aim to diversify MPL and focus on developing ahm.

Industry Analysis

Fingers are pointed at the federal government by many experts over the decline of the health insurance industry in Australia. Policies have been criticized. APRA’s data shows 2.8% pre-tax margins this year for 38 health insurance providers – a 43% decline. Covid19 has added to the pressure that was already mounted on the insurance industry.

The chart below shows the market share of the insurance providers in Australia. Bupa and Medibank make up more than 50% of the industry.

The job market globally and in Australia has taken a hit due to the pandemic. This is a cause for concern as we expect the industry to suffer further from lower new customer sign-ups for private health insurance. Medibank’s ahm will seem much more attractive to buyers. The firm also looks to have identified this and are looking to strategically focus on the development of ahm.

The industry comes with high competition, high regulation, and higher risks due to the pandemic. Private health insurance may need an overhaul to save it from structural decline as consumer behaviour of the younger generation has definitely changed.

Investment Thesis

The operating profit for an insurance provider in simpler terms is revenue received via premiums – expense claims incurred. Medibank incurred a 2.5% increase in claims and only a 1.3% increase in revenues from insurance premiums. This translates to 2x growth rate of claims relative to its revenues – complementing a declining industry trend we explained earlier. As a result of this – the operating profit stood at $470.6m in FY20, a 13.3% decline from FY19.

The firm’s returns across its assets, capital and equity has been on a declining trend. The chart below shows just that. However, we do believe that these returns are exaggerated due to the pandemic situation and the firm’s decision to delay the 3.27% premium increase by 6 months, a gesture that surely would have made their customers happy.

The delay over increase in premiums is estimated to have cost the firm around $80m. This would have taken their operating profit growth rate to a positive number – 1.5%. Their annual report showed a 0.6% increase in new policies. While this number may be low, the retention rate of its customers is high for Medibank. The delayed increase to premiums will also ensure their retention rate does not drop.

While MPL’s returns and profits may have taken a hit, a look at the health of the firm reassures investors. The firm has close to $2 billion in cash, which is roughly the same amount of total liabilities it has. The short- and long-term health of the firm is sign of strength. The capital structure of MPL complements our take on good financial health, with equity making up 94.3% and debt 5.7%.

Medibank has a paid 12 cents in total dividends in FY2020 at a yield of 4.65%. The firm has maintained a stable dividend payout over the last 5 years, and we do not expect it to change in the future.

Recommendation

Medibank is in an industry that will have an intervention soon so as to save it from decline. The firm has had a rough year due to an unforeseen event (Covid19). However, MPL comes with an upcoming increase in premiums, a focus on ahm to increase growth in policyholders, and a fairly constant dividend payout. The firm is the 2nd biggest player in the industry and is also in a position of strong financial health. Hence, we give MPL a “Buy” recommendation as we believe the stock is trading at a low price relative to what its fundamentals suggest.

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