About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 22 August 2016, 1:11 PM
- Sectors Covered:
- Insurance, Diversified Financials
Medibank's FY16 NPAT (A$418m) was 3% above consensus, driven by a strong Health Insurance (HI) operating profit of A$510m, ~8% above guidance (A$470m). The FY16 HI gross profit margin of 16.6% was ~2.5% above the pcp (14.2%) reflecting low industry claims utilisation trends and Medibank cost initiatives such as the payment integrity program.
The Management Expense Ratio (MER) of 8.4% bettered guidance of 8.5% reflecting realisation of additional operating efficiencies. FY16 HI top line growth was the result disappointment at 4% (guidance of 4.5-5%). FY17 outlook commentary was broad, without quantitative detail, pointing mainly to a continued tough top line environment and expected further normalising of claims utilisation rates.
Health Insurance (HI) top line growth still concerning
HI top-line growth was just 3.4% in 2H16 on pcp, with MPL policyholder numbers declining 1.6% in 2H16 (FY16: 2.6%). Policyholder losses have related to both acquisition and lapse issues primarily with the Medibank brand. The only positive on the revenue story was a 5% improvement in the revenue per policyholder metric in FY16 on improved business mix/cover reductions. While MPL is prioritising customer outcomes, we note the Delphi core policy management system will not be fully bedded down until 2H17. Furthermore, there appears to be minimal evidence of any benefit from MPL's recent marketing initiatives.
Strong margin outcome but can margins be maintained?
HI's cost performance has been highly impressive in our view. FY16 claims costs rose just 1%, while absolute HI management expenses were broadly flat. On HI claims costs, we note current minimal cost growth compares to average growth of 6% p.a. over the five year period ended FY15. Hence with HI margins arguably at cyclical highs, we see downside risks to margins increasing as cost wins slow and MPL has to materially invest in the business to drive growth.
Overall MPL has, in our view, delivered strong results since listing. While further cost out is a near-term theme, we feel that risks to HI profit margins are now tilting to the downside. We remain of the view that if HI top line growth is not restored, MPL could return to a mid-single digit EPS growth stock quickly when cost out ends. In that scenario its current 19x FY17F PE multiple could be hard to justify.
We maintain our Hold recommendation.
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