The Initial Public Offering (IPO) of Medibank Private Ltd (ASX: MPL) at the end of 2014 was a success; shares have remained above their offer price in the 15 months since. For a launch so heavily bought into by household investors, this was a vital consideration.
Yet the performance of the business improved as well. Revenues rose, profits were up, profit margins improved, and the company paid a 5.3 cent dividend equivalent to a yield of 4% for those that bought the stock in the IPO.
Earlier this morning, the company also announced a profit upgrade for the first half of 2016 as a result of improved claim outcomes (including reducing improper claims), improved hospital contracting and a slowdown in hospital utilisation growth.
Lower-than-expected new sales impacted first-half revenue growth however. Although the below results are not audited, shareholders should expect:
- Premium revenue growth of between 4.5% and 5% (previous guidance: 'above 5.5%')
- Management expense ratio of 8.5% (previous guidance: '8.3%')
- Operating profit of above $470m (previously 'above $370m')
- Second half operating profit is expected to be lower than first half
It looks as though Medibank's performance could be improving, after a number of concerning signs in the full year 2015 report.
In 2015 management reported growth in the number of members was below the market average and that average revenue per user grew by only 4.6%, despite 6.5% (1 April 2014) and 6.59% (1 April 2015) legislated increases in premium rates.
Management stated that slower revenue growth per user was due to changing product mix, as well as customer reductions in cover. Medibank also reported that its low-cost ahm brand continues to grow rapidly. Both of these facts indicate to me that the company is having to compete on price, which is not a method for growing shareholder wealth – unless volumes are growing rapidly, which they aren't.
Today's update however indicates that Medibank is making some progress, although it will continue to struggle to gain revenue as a result of a relatively small market, and stiff competition from players like Bupa and NIB Holdings Limited (ASX: NHF).
With regards to profitability, Medibank statistics show that a small portion of customers account for a disproportionate percentage of claim payments, so there could be further room to grow profits by reducing claims and promoting positive health behaviours.
While legislated premium increases and a focus on claims should deliver growth over time – assuming Medibank maintains its market position – it is unlikely to deliver stellar results unless Medibank can start taking market share from competitors.
Swelling profits at Medibank (or growing market share, for that matter) could simply intensify price competition, and Medibank continues to compete on price with its competitors.
For these reasons, and despite the positive update, I do not believe Medibank Private is a 'buy' today.
