What everybody needs to know before buying Medibank Private Ltd shares

As we saw two weeks ago at its Annual General Meeting (AGM), Medibank Private Ltd (ASX: MPL) updated the market to expect no growth this year. As a result of competition and reinvestment in its products, management forecast a flat operating result for the current year. Shares fell at the time, although they recovered quickly.

Medibank shares are down again today following its investor presentation, which revealed both good and bad news.

source: Company presentation

source: Company presentation

This is the bad, in a nutshell. Medibank has been under-performing and competitors are taking market share. Privately-owned Bupa has been very strong recently, and we can see other listed insurer NIB Holdings Ltd (ASX: NHF), or ‘nib’, has a stable ~7% of the market.

Fortunately, management has a pretty comprehensive strategy for turning Medibank around, and today’s presentation alongside the recent AGM slides were informative in this respect.

One key initiative is partnerships with health providers (the hospitals, etc, that perform the treatments on patients), and the degree to which Medibank is now contracting its relationships with these. This helps Medibank control outcomes for patients and costs associated with poor practice and re-admissions. The figures for future years will likely improve as we get closer to the date.

source: Company presentation

source: Company presentation

New, heavier investment in improving the customer experience should also benefit the company in terms of higher retention rates and improved customer experience, although it will be costly.

Medibank has set itself some seemingly contradictory challenges in that it wants to have better customer service and fewer complaints than competitors (which will increase costs) within three years, while simultaneously maintaining higher profit margins than competitors.

source: Company presentation

source: Company presentation

If Medibank wants to have fewer complaints (PHIO = Public Health Insurance Ombudsman) and a better Net Promoter Score (NPS) than peers, it will probably need better customer service, and simpler products. That won’t come free, but some things like simpler products and better IT systems will be one-off expenses for a long term benefit.

Still, the only way Medibank can maintain better margins than competitors is either to have lower operating costs, lower claim expenses, or higher premiums.

We’ve already seen that higher premiums won’t work, because Medibank is currently investing to give customers more bang for their buck. Better customer service and more call centre staff suggest that operating costs won’t be lower, plus Medibank also has ASX listing plus share registry fees and similar that privately owned insurers don’t have. That appears to put responsibility almost entirely on lower claim costs as a means of maintaining market-leading margins.

Foolish takeaway

Medibank management is going the right way about turning the company around. They’re acting to address under-investment, poor customer experience, and a variety of other concerns. I have no issues here, but investors need to be realistic about whether the company can simultaneously become the most loved and the most profitable health insurer in Australia. I continue to think Medibank is a ‘Hold’ at today’s prices.

A much better bet than Medibank

Forget health insurers - these 3 "new breed" blue chips pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.