Medibank: Largely as expected and pretty clean

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
26 August 2021, 11:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • MPL’s FY21 result was 1% above company-complied consensus at NPAT, with a beat in the Health Insurance (HI) business being offset in other areas.
  • In our view, it was a relatively clean and solid MPL result, with the main positive being the much improved HI policyholder growth trends in FY21.
  • We downgrade MPL FY22F/FY23F EPS by 1%-3% mainly on slightly more conservative HI gross profit margin forecasts. Our PT reduces marginally to (login to view).
  • We have been impressed with MPL’s recently improved policyholder growth trajectory and the claims environment remains favourable overall. However, trading on ~23x FY22F PE we see MPL as close to fair value. HOLD.

Event summary

MPL’s FY21 result was 1% above company consensus at NPAT. A ~5% operating profit beat versus consensus in the Health Insurance (HI) business being offset in other areas like Medibank Health (Operating profit = ~A$32m vs A$39m expected) and higher other expenses (-A$12m vs -A$6m expected), etc.

FY22 guidance metrics include 3% policyholder growth, average net claims expense per policy unit (PPU) growth in-line with 2H21 (2.4%, among resident policyholders) and targeting A$15m of productivity savings in HI management expenses.

In our view, it was a relatively clean and solid MPL result, with the main positive being the much improved HI policyholder growth trends in FY21.

The good

Group operating profit was up 15% on pcp, with good growth achieved in both the HI and Medibank Health (MH) business profits (+12%-+15% on pcp) 

Policyholder growth, ex CV-19 adjustments, was +3.5% on pcp, with the Medibank brand growing 1.3% and the AHM brand growing ~11% over the year. HI saw an impressive 130bps improvement in retention levels.

The HI reported gross profit (GP) margin of 16% was up on 15.5% in the pcp, assisted by ~A$25m in prior period reserve releases. The Resident HI business saw a relatively stable underlying GP margin on pcp of 15.2%. 

MPL retains a large provision for CV-19 claims (A$224m vs A$297m in pcp) which may see further releases. MPL has said any benefits will ultimately flow to customers. 

HI management expenses (A$531m) were down ~2.5% on pcp with the underlying MER falling to 7.9% vs 8.2% in FY21. A further A$40m of additional productivity savings is expected between FY22-FY24, including A$15m in FY22.

The FY21 investment income result of A$120m improved significantly on pcp (FY20 = A$2.4m) benefitting from a strong performance in growth assets.

MPL’s capital position remains robust and at the top of managements target range (11%-13% of the premium level).

The not so good

The group HI underlying GP margin of 15.5% was down on pcp (15.9%), with claims per policy unit growth (PPUG, 3.1%) being higher than revenue PPUG (2.6%). This fall was attributable to the overseas HI business segment which saw revenue and costs pressures linked to CV-19 .

MH had a weaker 2H21 operating profit result (~A$13m vs A$19m in 1H21) on lower Telehealth earnings and border impacts on the Travel insurance business.

Changes to forecasts

We downgrade MPL FY22F/FY23F EPS by 1%-3% on slightly more conservative HI gross profit margin forecasts. Our PT lowers marginally to (login to view).

Investment view

We have been impressed with MPL’s recently improved policyholder growth trajectory, and the current claims environment remains broadly supportive of HI operating margins near term.

However following a good recent share price run we see MPL as trading closer to fair value (~23x FY22F PE) and we maintain our HOLD call.

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