Medibank Private Ltd (ASX: MPL) shares could be a candidate to produce solid returns in FY25 and perhaps beyond, according to a leading broker.
The ASX healthcare share has seen its fair share of volatility, as shown on the chart below, as it was smashed by a cyberattack in October 2022 and then recovered from the fallout.
One leading broker spies an opportunity with the leading Australian private health insurer.
The company could deliver returns through both a rising share price and a growing dividend, according to UBS.
Why UBS is excited about Medibank shares
The broker's positive view on the ASX healthcare share is based on the low ongoing claims inflation, which supports margins remaining in the 8% to 9% range.
Medibank experienced claims inflation, meaning average claims per policy unit, of just 2% during the first half of FY24, compared to guidance of 2.6%. UBS noted FY24 guidance has been upgraded to 2.2% to 2.4%.
The broker described the outcome as "positive" and said it demonstrated that the claims base had "several different gears". UBS noted that claims remained below pre-COVID levels in psych, rehab, respiratory and prosthesis, which was funding higher claims inflation in private surgical.
The broker also pointed out that the favourable claims outcome triggered another customer's $215 million 'giveback.
UBS said the resident claims ratio improved by 0.4 percentage points compared to the prior corresponding period, while the private health insurance net margin rose by 0.1 percentage points to 8.1%.
The broker forecasts that the private health insurance margin will remain "higher for longer" at above 8% between FY24 and FY26, which is a positive for Medibank shares.
Some disappointments
One negative for the ASX healthcare share was that its other costs were "disappointing", with cost growth of 10.9%. There were several "unusual" items, including non-resident commissions increasing by more than 40%, resident commissions being fully expensed, business-as-usual cost inflation of around 5%, and IT security and payroll tax costs of $4 million.
FY24 guidance costs of between $610 million to $615 million implied 4% to 6% cost growth in the second half of FY24, and this will be aided by a "small step-up in productivity gains.
UBS also said policy numbers were "disappointing", falling by 1,800 in the November and December period. The broker attributed this to a "more competitive environment recently", requiring "greater retention activity". UBS said the FY24 guidance of 1.2% to 1.5% policy growth appeared to be "optimistic". The broker's estimate is for 0.9% growth.
Price target and dividend
UBS has a price target of $4.20 on Medibank shares, which suggests a possible rise of 14%. The broker projects Medibank could pay an annual dividend per share of 18 cents, which translates into a fully franked dividend yield of 4.9%.
Together, the capital growth and dividend could produce a total return of around 19% over the next year or so.
