Shares in Medibank Private (ASX:MPL) have recently re-rated due to several factors. These include a moderating claims environment and clear strategies to improve policyholder growth and margin expansion. We research the Company in The Dynamic Investor recently. With the shares having since come off their recent highs, do current levels present an attractive entry point?

About Medibank Private

Medibank Private’s core business is the underwriting and distribution of private health insurance (PHI) policies through its two brands. The first is Medibank (which accounts for ~72% of polices). The second is AHM, which is positioned around affordability. AHM has increased its contribution to total policies from ~15% in 2016 to ~28%.

The Company offers Hospital Cover and Extras Cover to customers in Australia as well as health insurance to overseas visitors and students (via the Health Insurance division). It also participates in the broader healthcare industry through the provision of integrated healthcare services to policyholders, government, corporate and other customers (via the Medibank Health division).

Key Fundamental Drivers

Targeting Increase in Policyholder Growth

For the six months to 31 December 2024 (1H25), MPL reported policyholder growth +0.4% compared to FY24. Across the Medibank and AHM brands, policyholder growth was -0.1% and +1.6%, respectively. With 1H25 policyholder growth tracking below system, the Company will aim to grow in line with market during 2H25, and aims to grow market share in FY26.

In order to boost policyholder growth in 2H25 and FY26, MPL has committed to returning an additional $160m to customers in order to support customer retention.

MPL’s recent track record suggests that policyholder growth in 2H25 will be below system. However, the Company is confident it can improve acquisition and retention rates for both the Medibank and AHM brands and thereby increase policyholder growth. Other supporting factors include: i) MPL’s premium rate rise being lower than some of its key competitors (Bupa: 5.10%; HCF: 4.95%) and ii) The 2nd half generally being a seasonally stronger period than the 1st half.

Margin Expansion Expected For PHI

Net margin (defined as gross profit margin less Management Expense Ratio (MER)) for PHI expanded by 40 basis points to 8.5% in the recent interim result (1H25). Although MPL will recycle some benefit from higher gross profit margin into marketing, net margin in FY25 is expected to expand. This is due to the Company targeting improved policyholder growth and market share gains in FY26. There is also scope for net margin to slightly increase in FY26-27 given that 1H25 claims payments were ~$80m below claims incurred.

Further, MPL believes it has reached the peak of cost inflation in FY24 which saw the overall Management Expense Ratio (MER) increase by 30 basis points to 7.8%. However, this was predominantly driven by an increase in sales commissions (+20 basis points). The latter reflected the increased portion of AHM sales via the aggregator and growth in non-resident sales commissions.

Strong Balance Sheet & Capital Position

The balance sheet remains well capitalised. MPL remains well placed to fund further growth and support Merger & Acquisition (M&A) aspirations. In particular, the Company has an M&A target of $150m-$250m between FY24 and FY26. The Company has also flagged that it will consider capital management in the absence of suitable M&A opportunities.

Potential Regulatory Changes an Investment Risk

Subsequent to announcing the most recent premium rare increases, the federal government urged PHIs to increase payment to hospitals. The prospect of federal government measures to make PHIs pay hospital more presents a risk to the outlook for improved profitability, given the potential for claims inflation increasing quicker than expected.
However, in the longer term, any changes could benefit PHIs by eliminating the uncertainty of annual premium rate approvals.

According to media reports, the federal government has recommended a long-term industry payout ratio (i.e. the percentage of premiums paid to hospitals) of 90%. This represents an increase from the pre-COVID-19 average of 86%, and peak of 88% in March 2014. The 2024 industry payout ratio was 84%.

In response to the federal government recommendation, the CEOs of major PHIs Medibank Private, Bupa and NIB have offered to short-term financial assistance (unspecified) to hospitals in financial distress. This offer is in exchange for the government surcharge on medical devices to be provided to hospitals instead of medical device companies.

Fundamental View

MPL’s fundamentals have improved in the last 12 months, underpinned by the factors referred to above as well as solid growth in its non-residential segment. However, at current levels, MPL’s multiple (~18.5x) is in line with the historical average multiple of ~19x. The multiple is also at the upper end of the range over the last ~2 years. Accordingly, we consider lower levels as a more attractive entry point.

Charting View

Our previous charting comment in early-October in The Dynamic Investor noted that MPL was likely to edge higher and retest the recent high near $4. After doing that earlier this year, it broke through resistance in late-February and rallied on good volume. The shares are now consolidating against that strong move. A further dip towards $4.15 would be a buying opportunity.

 

Michael Gable is managing director of Fairmont Equities.

 

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