The Medibank Private Limited (ASX: MPL) share price is down 29% in 2018, is it a buy?
Medibank is Australia's largest private health insurer with the Medibank and the low-cost ahm brands.
The company managed to produce a group operating profit of $548.8 million in FY18, which was an increase of 9.7% on the prior year. This came about from slightly higher premium revenue and lower expenses.
Impressively, Medibank also managed to grow total policyholders by 0.3% and the average revenue per policy by 1.9%. But, when you dig into the numbers a little, Medibank's total policyholders fell by 2.2% and ahm's grew by 11.2%.
The problem for Medibank and the whole private health industry is that private health insurance premiums are becoming unaffordable with inflation-beating rises and low wage growth for policyholders. This is particularly the case for younger policyholders.
Medibank has been an impressive dividend payer since it started paying one in 2015, it has increased every year since then and currently offers a grossed-up dividend yield of 7.8%.
I like the idea of private health insurance businesses, they're a good way of getting diversified exposure to all the healthcare issues and take a slice of profit between the patient and the provider. But, it's only worth investing in if the whole system is growing.
Until the underlying weakness with demand for private health insurance is rectified there is a danger that the younger healthy policyholders who subsidise the system leave to be replaced by older policyholders who will increasingly be a net cost. This would make it hard for Medibank to grow profit.
Foolish takeaway
Medibank is currently trading at under 14x FY19's estimated earnings. If you've been looking to buy Medibank shares for a while then it's currently the cheapest it has been since 2016, so it's a better time to buy today. But, I think there are better ASX growth options out there for your money.
