Medibank Private Ltd (ASX: MPL) confirmed that it is on track to hit its full-year earnings guidance of $258.2 million after it posted a half-year net profit after tax (NPAT) on a pro-forma basis of $151.2 million, up 10.8% on the prior corresponding period.
The health insurer reported a 3.7% increase in revenue for the period ($3.27 billion), buoyed by a 5.2% increase in premium revenue growth, while it also recognised a significant improvement in its operating margin, which rose from 4.5% to 5.9%. This was a good result for Medibank, which had a profit margin significantly behind that of rivals such as Bupa and NIB Holdings Limited (ASX: NHF) in recent years.
Investors were also hoping for a significant improvement in management costs which have hindered profit growth in years gone by. Medibank Private said that its Management Expense Ratio had fallen from 9.2% to 8.0%, a decrease of $22.3 million, although greater spending on projects and marketing in the second half will see that figure rise closer to 8.7% for the full year.
So What: Medibank's half-year results presentation has been one of the most highly anticipated reports this earnings season. The ex-government-owned health insurer listed on the ASX on 25 November 2014 for $5.7 billion in what was the biggest float since that of Telstra Corporation Ltd (ASX: TLS).
Although the stock has shot up in price since then, many analysts and investors have expressed their concerns regarding the insurer's ability to improve costs and become more competitive, to ultimately justify its rising share price. It closed at $2.56 on Thursday trading at 27.2x last year's earnings.
While the health insurer believes it can hit its full-year earnings guidance, it does expect strong headwinds in the second half. It said it, "expects health insurance industry headwinds to continue with rising healthcare costs challenging affordability for customers, resulting in further product downgrades and churn."
Now What: Although the insurer is making cost and efficiency improvements, it is still quite a risky investment considering the lofty price at which the stock currently trades. As such, investors may be better off exploring some of the market's other more compelling opportunities instead.
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