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Why the Medibank Private Ltd share price is getting slammed today

The Medibank Private Ltd (ASX: MPL) share price is down 7.2% to $2.55 in Monday morning trade after the private health insurance provider handed investors a shock update.

The group revealed that it has lost its Garrisson Health Services contract to provide private health insurance services to 60,000 permanent and 20,000 reservist members of Australia’s armed forces.

Medibank had the contract for the past 6 years, but it has not been selected as the ‘preferred tenderer’ for a new contract under what is likely to be a competitive bidding process for a lucrative contract.

Medibank’s listed private health insurance rival in NIB Holdings Limited (ASX: NHF) has seen its shares fall 3% to $5.16 today, which suggests investors are betting against it having picked up the contract as well.

On October 31 NIB delivered a profit upgrade to the market, but since then has not announced any market sensitive news.

Medibank will continue to provide healthcare to the Australian Defence Force members until its contract expires on June 20 2019, but had a warning for investors about the financial consequences of the lost deal.

In total the operating profit from the contract over FY 2018 was $30 million, with “exit costs” associated with the loss of the contract expected to be $5 million over the second half of FY 2019. It seems Medibank investors are looking at a material hit to the bottom line of a company that reported a net profit of $445.1 million in FY 2018.

Analysts are also likely to update their forecasts this week as to Medibank’s future revenue and earnings which could lead to downgrades to price targets later in the week.

Medibank had already reported a tough FY 2018 with earnings per share down 1% as it had more customers than expected relinquish policies in order to take their chances using the public Medicare health services.

The stock is now down 20% over the past year and could come under more selling pressure until it delivers a positive operating update.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings Limited. 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 Scott Phillips.

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