I like boring stocks. And one of the most boring must be Medibank Private (ASX: MPL). Often thought of as a healthcare stock rather than a financial company involved in the health industry, it is boring because it is not volatile, doesn’t move around much and seems to have distinct ‘buy’ and ‘sell’ zones. Right now, it is getting back towards the buy zone.
Since its IPO in very late 2014 at a price of $2.15 (retail shareholders paid $2.00), it has largely traded between $2.50 and $3.00, but with an upward bias (see chart below). Over a 5 year period, this is a very tight range. It went for a run last year when Bill Shorten was defeated and the RBA cut interest rates, up to a high of $3.62 in June and again in August, but it has largely been easing lower ever since. On Friday, it closed at $2.91.
Medibank – 2/15 to 2/2020
Source: nabtrade
This puts Medibank back into the long-term range, albeit at the higher end. Is it back into buy territory?
Last week, Medibank released its half year results. Let’s see what Medibank had to say, and whether the broker analysts agree.
The good news
Medibank reported group operating profit of $218.8m, down 20.9% on the corresponding half of FY19. A blow out in health insurance claims, which rose by 5.9%, was the main culprit.
Premium income increased by 2.3% on the back of Medibank growing its customer base by a net 20,400 customers. Australia’s largest health insurer with 1.81m customers, this marked the fourth consecutive half year of market share gains – the highlight of the result. Admittedly, the growth was with Medibank’s “Jetstar” brand, AHM, which saw net policyholder growth of 29,700 customers, while the “Qantas” brand, Medibank, declined by 9,300 customers. However, Medibank says that it is confident of arresting the decline and expects customers to stablise by the end of FY20 and grow during FY21.
A second highlight was the decline in management expenses, which fell by 9.6% to $248.1m. This saw the management expense ratio (the proportion of each premium dollar of revenue spent on internal expenses) fall from 8.5% to 7.5%. Medibank expects a pick-up in the second half, but is on track to deliver $20m of productivity savings in FY20 and $50m over the next three years.
The bad news
The challenges Medibank faces are largely all external from the enormous headwinds that the private health insurance industry faces:
- Declining health insurance membership as customers vote with their feet and say that private health insurance is “too expensive”. According to the latest data from APRA, the number of Australians with private hospital cover fell by 9,400 in the December quarter. Only 44.0% of the population has hospital cover;
- Pressure on premiums, with Government under pressure to limit premium increases;
- Claims inflation, particularly relating to prostheses and with dental; and
- Age mix, as younger, healthier customers leave the system or delay taking out insurance, leaving older, less healthy customers.
To counter these trends, Medibank is working on strategies to facilitate a shift to alternative ways of delivering care, such as “in-home care” where it is targeting 300 virtual hospital beds by FY22, as well as offers to its members to enhance loyalty by recognising and rewarding membership. It is also investing in Medibank Health, which provides non-insurance related services such as home support services. Profit from this business was $13.3m in the half year.
Dividend pressure
In FY19, Medibank paid two ordinary dividends: an interim of 5.7c per share and a final of 7.4c per share. The total of 13.4c represented a dividend payout ratio of 80% – bang in the middle of Medibank’s target range of 75% to 85%. It also paid an additional special dividend of 2.5c per share.
For the half year ending 31 December 2019, Medibank has declared an unchanged fully franked dividend of 5.7c per share. This represents a payout ratio of 88%.
Medibank says that it expects underlying claims growth to ease moderately in the second half to 3.0% with similar utilisation levels. For FY 20, it expects the dividend payout ratio to be “at or above our target of 75% to 85% of underlying NPAT”. The broker analysts are currently forecasting a full year dividend of 12.2c per share, implying a final dividend of 6.5c per share, down from 7.4c in FY19.
Certainly no special dividend, and some chance of a cut to the final dividend.
What do the brokers say?
Apart from forecasting a small cut to the dividend, the brokers see the stock as fairly valued, but an underperformer. Margin pressure due to the widening gap between slow revenue growth and increasing claims inflation is the main concern. There is very little enthusiasm for the stock, with 3 neutral ratings and 4 sell recommendations. Six out of the seven major brokers reduced their target price following the release of the February profit result.
The following table shows individual recommendations and target prices. The consensus target price is $2.89.
On multiples, they have the stock trading 21.4 times forecast FY20 earnings and 20.4 times forecast FY21 earnings. They forecast a dividend yield of 4.2%.
Here’s my view
The positives for Medibank are that under CEO Craig Drummond, it looks like it is making good headway – growing share and customers, managing costs, and taking a lead role to help drive industry reform. It has a strong balance sheet, which could be deployed for the inevitable mergers in the industry, or as some analysts have flagged, a possible capital return to shareholders.
The negatives are the industry head-winds.
But it is back in the long term price range, and while it is no bargain at $2.91, there is also not much downside on the stock. Boring. For income seekers, a prospective yield of around 4% is attractive – this stock could be reasonable buying in any market pullback
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.