Company Overview - Medibank Private Limited is an Australia-based integrated healthcare company. It provides private health insurance and health solutions. The Company directly or indirectly provides a range of insurance services including hospital insurance for private patients, ancillary or extras cover, private health insurance for overseas students and visitors to Australia, life insurance, travel insurance and pet insurance. The Company’s insurance products include Medibank Travel Insurance, Medibank Life Insurance and Medibank Pet Insurance. AHM is its private health insurance brand. The Company’s Medibank brand is a health insurer.



Analysis -  Medibank Private Ltd (ASX: MPL) has reported its first half of 2015, on track with its prospectus pro forma fiscal year 2015 earnings forecast. The company reported a year over year increase of 3.8% to $3,269.7 million, as compared to $3,148.5 million in first half of 2014. The group was able to control its costs and thus witnessed a year over year increase in its operating profit and consequently profit after tax by 28.1% and 31.4% to $31.4 million and $11.4 million respectively.  As a result, the earnings per share improved to 5.5 cents from 5 cents in the corresponding period of last year.

Health Insurance Segment

The ongoing industry widedowngrading and affordability concerns by consumers on the back of increasing healthcare costs has reduced the groups’ revenue growth as well as slightly decreased its market share. The health insurance premium revenue surged 5.2% to $2,943.3 million, from $2,797.4 million, while the gross profit rose 6.4% to $408.2 million from $383.5 million in first half of 2014. The group has succeeded to reduce its Management expenses as a part of its Health cost leadership initiatives, and posted a year over year decline of 8.7% to $234.7 million. The management expense ratio decreased by 120 bps to 8% from 9.2% in corresponding period of 2014. As a result the operating profit improved by 37.1% yoy to $173 million.
 

1H15 Pro forma Health Insurance operating profit and Drivers (Source: Company Reports)

 
The Principal Policyholders slightly rose by 0.9% yoy to 1.83 million impacted by slow industry growth and rising costs. However the 1.5% yoy decline by Medibank branded polices was offset by 19.6% yoy growth by ahm brand policies to 0.25 million holder, driven by surge in its sales via the group’s direct channels. The ahm brand policies rose by 53% subsequent to its acquisition in 2009, with more than 500,000 members. The annualized average revenue per PSEU growth was just 4.2%, due to downgrade effect. 


Despite the pressure in the industry, the firm has been able to improve its gross margins slightly by 20 bps to 13.9% from 13.7% in 1H14, driven by rising hospital utilization rates and enhanced health cost management. The low claims growth during the period was due to decrease in membership growth on the back of product downgrading. However, investors need to note that Medibank has maintained competitive gross margins as compared to its competitors, in spite of the pressure.


Top six health insurance players gross margins (Source: Company Reports)
 
Complementary Services

On the other hand the group’s complementary services revenue plunged 10.1% to $331.5 million, against $368.8 million in first half of 2014, on the back of lower than expected performance by corporate health services. The operating margins also decreased by 170 bps to 2.2% from 3.9% in the corresponding period of 2014. To control this decline, the group is seeking to improve the operating efficiencies across its ADF Health Services Contract, Diversified Consumer Businesses and Telehealth, businesses.
 

 
Other highlights

The group improved its asset allocation to25% during the period from 17% and reduced the foreign exchange hedge exposure on international equities to 50%. The group maintained its Health Insurance related capital to 12.6% of premium revenue, on par with its previous guidance range of 12% to 14%. As per the balance sheet highlights, the first half of 2015 saw a major cash decline to $470.8 million from $752.7 million of the comparable period, as $238.8 million dividend was used to the Commonwealth pre IPO as well as for strategic asset allocation. But the company has not debt or obligations as of December 2014.
 
Outlook

Although Medibank’s results were on par with its forecasts, the rising healthcare costs which in turn affected the customers affordability, led to product downgrades and churn. Therefore the shares of Medibank Private generated a negative year to date returns of 13.3%, with the stock touching its all-time low level of $2.0. As we have mentioned in our earlier report, there was a mad rush for Medibank IPO and overbidding by investors. Therefore the stock touched its all-time high $2.59, but could not sustain these levels and has been falling since March. But with the stock falling below its Initial Public offering price, we believe that the investors have overreacted on the group’s outlook of headwinds in the industry it operates.

The company’s target industry is a mature market as health insurance has touched a saturation point in Australia. However, investors should not forget that Medibank is a value company and is well positioned to leverage the growing population and Australia’s ageing population. We believe that firm will be able to maintain its earnings, by decreasing operating costs, growth from acquisitions and has the capability to regain its market share from competitors. The firm’s ahm business is showing rapid growth and is expected to continue the same further. 


Medibank Daily Chart (Source - Thomson Reuters)

Meanwhile, the group’s investment in strategic areas like IT renewal program, PNIC is ongoing to improve its capability and the project spend is inclined to the second half of 2015. Moreover, the company estimates to improve its management expense ratio further to 8.7%, which is better than its earlier Prospectus forecast. The group’s capital position shows the entire cost of product bonus additions will be reflected during the second half of the fiscal year. The company is making all efforts to tackle the challenges it is facing, by aiming membership growth via its two-brand strategy, product design, continuing health cost leadership initiatives and ongoing efforts to control management expenses.
 
 
Australia Private health insurers market (Source: Company Reports)
 
Meanwhile, the Pro forma entire fiscal year profit is estimated to be inclined to the first half, mainly due to the claims provision release and timing of management expenses. The group estimates a statutory profit of $250.9 million and net profit after tax of $258.2 million for the entire fiscal year of 2015. This estimate excludes the benefit of the forecasted $10 million release of June 20^th, 2014 claims provision (net of risk equalization and tax). Moreover, the management confirmed its target is to pay the first dividend as a public company during September 2015, but this will be dependent if the group performs on par with its and other relevant factors.


Fiscal year 2015 estimates (Source: Company Reports)
 
Based on the foregoing, we give a “BUY” recommendation to the stock at the current levels of  $2.07.

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