The Medibank Private Ltd (ASX: MPL) share price could be set to fall this morning after a mediocre half-year report from the company, which revealed sharply lower insurance profits, even though overall profits eked higher. Here's what you need to know:
- Health insurance revenue rose 1.2% to $3.1 billion
- Complementary services revenue fell 7% to $279 million
- Net investment income of $80 million, up from $25 million previously
- Net profit after tax (NPAT) rose 1.9% to $232 million
- Dividends of 5.25 cents per share
- Management expense ratio rose 8% to 8.9%
- Net tangible assets (NTA) of 48 cents per share
- Confirmed guidance for health insurance operating profit of approximately $490 million for full-year 2017 (this half: $249 million)
So What?
A poor result from Medibank – albeit not as bad as I expected – with expenses increasing, revenue growth weak, and sharply lower operating profits in the insurance division. This was partly offset by growth in complementary services and of course the big jump in investment profits (due primarily to strong share market returns).
As we covered previously, Medibank set itself 6 main goals for the near term. The company's progress towards these is best summarised in this diagram from today's presentation:
According to this chart, the company made respectable progress towards most of its initiatives, with the exception of market share (that should recover later as the customer experience continues to improve). To be frank I thought Medibank's problems would take a lot longer to come to grips with, so the announcement that it has already fixed 85% of the 50 biggest customer 'pain points' (things that tick the customer off) is quite a step forward. Private Health Insurance Ombudsman (PHIO) claims also declined significantly, although still account for roughly twice what would be expected from Medibank's market share.
Medibank also reported significant progress towards fixing IT bugbears in the new computer system. The core health insurance business continues to face issues however, with total policyholder numbers declining 2.5%. That was driven by a 4.1% decline in Medibank-brand policies and 8% growth in the smaller, low-cost ahm brand.
Now What?
Given all the progress made on fixing the customer service experience recently, investors should expect a) further improvements in the future, and b) that these improvements will lead to improved policyholder growth, a lower lapse rate, and/or a positive impact on market share.
The second half of this year is expected to come in slightly weaker and my back of the envelope calculations suggest Medibank is priced at around 19x its full-year earnings. This doesn't appear unreasonable, but I am wary about Medibank's high level of profitability compared to competitors. This suggests either that competitors are inefficient, or that their policies offer much better value to members. I'm still lukewarm about Medibank and consider it a hold today.
