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Bell Potter puts $2.97 target on Medibank Private Ltd shares: should you buy?

Following Friday’s profit upgrade, analysts at Bell Potter upgraded their price target on Medibank Private Ltd (ASX: MPL) from $2.63 per share to $2.97. This following Medibank’s announcement that Operating Profit would be above $470 million in the current financial year.

Macquarie Securities also upgraded their Medibank price target, from $2.65 to $2.72 per share, while cutting their recommendation from ‘Outperform’ to ‘Neutral’. UBS also lifted its price target from $2 to $2.15 per share.

Although Medibank announced marginally slower revenue growth (from 4.5%-5%, down from ‘above 5.5%’) and a slightly higher management expense ratio (8.5%, compared to 8.3% forecast previously), the operating profit reflects a significant improvement and this likely formed the basis for Bell Potter’s upgrade.

Over the longer term, Medibank has several challenges and opportunities. While I wrote on Friday about the risks facing the company such as price competition and customer switching, Medibank could also significantly improve its profitability as a result of a few initiatives the company is undertaking.

Medibank Managing Director George Savvides was quoted in Fairfax media as stating up to $3 billion could be ‘unlocked’ by preventing the costly treatment of private patients in public hospitals (estimated $1bn in savings), reducing the cost of prosthetics (estimated $800m in savings), and several other initiatives.

As a side note, shareholders in companies like Lifehealthcare Group Ltd (ASX: LHC) or Paragon Care Ltd. (ASX: PGC) may note the prosthetics initiative with some concern. Reducing the cost of fitting a prosthetic is likely to have bigger benefits than any pricing pressures which may materialise, as a result of making prosthetics more widely affordable (i.e., increasing demand).

Back on the topic of Medibank, not all of those $3bn in savings will accrue to Medibank of course – much will go back into the pockets of patients in one way or another, as Mr Savvides noted the cost of health insurance is becoming critical for many members. Nevertheless, Medibank and competitors stand to benefit significantly from the improved efficiency of the healthcare system.

However, on another front, the Australian Medical Association (also reported in Fairfax media) is looking to pressure the government into cutting down on health policies with exclusions for common procedures in them, as well as blocking insurers’ push to charge premiums based on factors such as age, health risks, and lifestyle factors (e.g. smoking).

Insurers are currently prevented by law from charging premiums based on these factors, and they also cannot increase premiums after a claim has been made (unlike what might be expected with car insurance, for instance). Medibank and competitors like NIB Holdings Limited (ASX: NHF) are thus in a tough spot, wedged in between a number of competing influential interests such as the hospital system, state and federal governments, and organisations of medical professionals.

So although there is plenty of potential to improve profitability for health insurers, it remains to be seen how many of their desired initiatives will actually go ahead, and how many existing practices will be pruned back or changed. As a result of the uncertainty, I would not feel confident buying shares in Medibank Private today.

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Motley Fool contributor Sean O'Neill owns shares of LifeHealthcare Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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