Ord Minnett Research Recommendation: Medibank Private (ASX: MPL)
Ord Minnett has revisited its model and investment view for Medibank Private to factor in its recent share price underperformance, a supportive claims backdrop that may continue (based on UK experience), higher bond yields, and placing more value on the near-term earnings certainty offered by the company given uncertainty in many other sectors from supply chain instability.
Health insurance industry growth in Australia has been low historically, with falling participation in health insurance, and Medibank has been losing share in premiums within the industry, although we note it is focused on addressing this issue. Underlying claims inflation across the industry currently appears to be running below earned premium rate increases, which is resulting in gross and net margin pressures for health insurers.
Recent feedback from large UK-based insurers suggests claims trends are still below pre-COVID-19 levels despite expectations of a bounce back. Medibank has $328.7m in deferred claims liability provisions to help offset any claims catch-up pressures. This is likely to shore up earnings rather than provide upside, as Medibank has promised to return COVID-19-related savings, although it is still valuable, in our view. Data on mobility, public COVID-19 hospitalisations and deaths shows that mobility and activity in the UK remain constrained despite opening up, implying caution in the public’s mind about elective surgery.
The federal election in May has introduced uncertainty and could see a change in government. The Labor Party hasn’t announced a specific health insurance policy, but it is pushing for higher wages in the health sector which could result in cost and margin pressures.
We have lifted our margins outlook for 2H22, reflecting a reinterpretation of claims inflation guidance from Medibank at the 1H22 result. Due to apparent seasonality in gross margin outcomes now, this should lead to upgrades in 2H22. We expect margins to fade eventually, however, as coming out of COVID-19 we believe the low policy rate rises might continue, and inflation may eventually come back. Our assumptions also include higher yields in future. We recently upgraded our recommendation to Accumulate from Lighten and raised our target price to $3.50 from $3.00.
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.