Medibank Private Ltd (ASX: MPL) shares have started the week in a subdued fashion.
In afternoon trade, the private health insurer's shares are down a touch to $3.52.
This compares unfavourably to the performance of NIB Holdings Limited (ASX: NHF) shares, which are up almost 2% this afternoon.
Why is the Medibank share price underperforming?
The weakness in the Medibank share price today appears to have been driven by a broker note out of Goldman Sachs.
According to the note, the broker believes that the company's shares are fully valued at current levels and has urged investors buy NIB shares instead.
Goldman has initiated coverage on Medibank with a neutral rating and $3.69 price target, whereas it has started with a buy rating and $8.80 price target on NIB's shares.
Why NIB over Medibank?
There are a number of reasons why Goldman is recommending NIB over Medibank currently. This includes its growth outlook, valuation, and last year's cyberattack. The broker explains:
We like NHF over MPL because 1) We expect NHF to have stronger ARHI underlying top line growth relative to MPL resident. We think this could be worth between 2.5-5% based on approved rate increases, policyholder growth and downgrading; 2) NHF is taking a more shareholder friendly interpretation to not profit from Covid-19 resulting in better reported margins vs MPL (see Exhibit 11) and lower policyholder giveback as a % of premium since the start of the pandemic – see Exhibit 4 ; 3) MPL's Cyber security legal cases and investigations present some risk of higher costs, but we think the risks here overall are low;
4) NHF offers greater diversity of earnings with about 23% of earnings (excluding NDIS) outside of resident health vs MPL at 15%; 5) We do flag, however, that NHF is guiding down net margins in ARHI over time but only as earnings in its non-resident businesses recover more fully. To date, NHF has been reducing margins through a combination of higher expenses and lower gross margin. 6) We note that NHF and MPL trade at about 18-19x consensus earnings on FY24 vs historical averages of about 19x over the last 5 years for both; noting the favourable operating environment, we think it is possible that the health insurers can trade at a premium relative to history and arguably NHF ahead of MPL given its better growth prospects without the overhang of the cybersecurity incident.
Time will tell if the broker has made the right call.
