Medibank: Confirming the strategy

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

28 October 2015, 3:23 PM

Sectors Covered:

Insurance, Diversified Financials

Review following recent AGM:

Retention the key top-line focus

Management noted that PHI industry churn had increased three-fold in the last five years and that affordability will remain an ongoing issue for the industry. In this environment, Medibank (MPL) is focused on becoming an industry leader on retention and building customer relationships by providing value, e.g. service quality, loyalty programs, etc.

On brand performance, MD George Savvides stated he is happy with the progress of the AHM brand, but believes the Medibank brand performance must be improved.

Management are confident the new IT system delivered by project Delphi is superior to peers and will provide a competitive advantage.

Hospital contracts have a variety of levers

Management remain intent on moving hospital contract negotiations away from a pure price focus to including mix, volume and quality components. Management are seeking improved outcomes through levers including avoidable mistakes, increased audit ability, and bed clauses, etc.

Management believe the Calvary Hospital dispute has not negatively impacted MPL's public image and they will forge ahead with trying to achieve better outcomes in re-negotiations.

While improved claims auditing, which helped drive the FY15 result, should provide some future benefits, management did acknowledge the low hanging fruit in this area has largely been picked. The greatest regulatory upside for MPL was called out as any reduction in procedures covered by the MBS, which provide only questionable patient benefits.

Our thoughts

The issue of affordability is arguably a bigger top-line headwind than we thought. However we believe management did a good job of highlighting the continued cost out opportunity from pushing through revised hospital contract terms and potential for favourable regulatory outcomes.

Overall FY16 guidance targets remain unchanged including a Health Insurance operating prof it target above A$370m. We lift our FY16/F17 EPS forecasts by c1.5%-2.5% given greater comfort around guidance following today’s presentation.

Investment view

We acknowledge the longer-term growth dynamics of the PHI space and were impressed by MPL's FY15 result. How ever we think MPL's current multiple of c22x FY16F PE factors in significant further cost out from here. We therefore see the stock as fair value at current levels and maintain our Hold recommendation. 

Morgans clients should login to view our target price for Medibank.

More information

Morgans clients can access more detailed analysis on Medibank by logging in. If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer(s): The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.