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Medibank share price up 4% despite 15% decline in half year profit

In morning trade the Medibank Private Ltd (ASX: MPL) share price has pushed higher following the release of its half year results.

At the time of writing the private health insurer’s shares are up 4% to $2.87.

What happened in the first half?

For the six months ended December 31, Medibank achieved revenue of $3,560.9 million and an operating profit of $293 million. This was a 2.7% and 2.4% increase, respectively, on the prior corresponding period.

During the period Health Insurance operating profit grew 1.5% to $281.5 million and Medibank Health operating profit increased 14.7% to $28.9 million. This was offset slightly by a 6.1% increase in corporate overheads to $17.4 million.

Due to significantly lower net investment income and slightly higher amortisation of intangibles, Medibank reported a 15.4% decline in net profit after tax to $207.7 million or 7.5 cents on a per share basis.

The decline in profits didn’t stop the Medibank board from increasing its dividend. It declared a 5.7 cents per share interim dividend, up 3.6% from 5.5 cents per share a year earlier.

What were the drivers of the result?

During the six months the company’s Health Insurance business grew premium revenue by 2.1% to $3,240.3 million due to policyholder growth. The ahm brand was the start performer, delivering 10.7% policyholder growth over the last 12 months. Management put this success down to ahm’s customer proposition of being simple, easy and affordable.

Both acquisition and retention metrics improved for the Medibank brand, with the improvement in retention supported by the launch of its customer priority program

Health claims rose by 2.3% to $2.7 billion for the half year, reflecting a 1.7% increase in gross claims, and a 50% reduction in risk equalisation receipts. Management advised that the reducing reliance on risk equalisation receipts is primarily due to the ongoing growth in ahm customers, who are generally younger and hold a lower level of cover.

Management expenses were roughly flat at $274.3 million, with the management expense ratio (MER) improving from 8.6% to 8.5% due to the lift in revenue.

Another positive was that the company’s underlying cost control and the ongoing benefit of its productivity program resulted in operating expenses falling by $3 million or 1.3% during the half.

Medibank is on track to deliver $20 million in productivity savings in FY 2019 with another $20 million expected in FY 2020.

What now?

In its outlook management advised that it expects flat overall private health insurance market volumes to persist. Operating conditions in FY 2020 are “likely to be challenging”.

It also expects hospital and extra utilisation growth to remain subdued in the second half and for management expenses to be modestly higher year on year.

In addition to this, management revealed that it is looking to make one to two small acquisitions in order to build its health services capability. One of these could be a private health insurance business, as management consider taking advantage of the stressed operating environment to buy at a fairer price.

Should you invest?

While I felt that Medibank’s operating result was reasonably strong, I didn’t see enough in the result or its outlook to make me a buyer of its shares. Especially with Labor pledging to cap rate increases if it wins the election.

Overall, I intend to stay clear of its shares and sector peers Healthscope Ltd (ASX: HSO) and Ramsay Health Care Limited (ASX: RHC) until trading conditions in the healthcare sector improve.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care 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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