This insurer remains one of Australia's best-run companies, says Martin Currie

Medibank Private (ASX: MPL) shares dropped 5% in early trade today on the back of its half-yearly result, which delivered positive numbers albeit slightly below what the market expected. 

Still, it’s a far cry from the 20% selloff the health insurer saw a little over 12 months ago after a Russian cyberhacker breach. The share price losses have long since been recouped, even as the Australian government have made the hacker’s identity public in recent days.

These are all non-issues in the broader context in the eyes of Matthew Davison, portfolio manager at Franklin Templeton-owned asset manager Martin Currie. He’s squarely focused on what he believes is one of Australia’s best-run companies, with a resilient business model and further growth potential as it expands into other parts of the healthcare space.

“All Australian insurance company share prices have been quite strong since January, so there was an expectation for potential upgrades, but none have really delivered that,” Davison says.
“At Medibank, the modest selloff we saw was mainly around management expenses and customer growth.”

Davison remains confident there’s far more upside than downside in Medibank Private, his team’s preferred exposure within the space. In the context of the latest earnings result, he delves into the reasons for this in the following Q&A.

Key results

• Group revenue up 3.3% to $4.02 billion
• Net investment income up 49.6% to $83.6 million
• Net profit after tax (NPAT) up 104.8% to $491.9 million
• Underlying NPAT up 16.3% to $262.5 million
• Interim fully franked dividend of 7.2 cents per share, up 14.3% from 6.3 cents

For more financial information on Medibank Private, head to Market Index.

Note: This interview took place on Thursday 22 February 2024.

1. In one sentence, what was the key takeaway from this result?

Medibank remains in good shape after this result, with claims costs still being contained. There are still some positive industry tailwinds there, but continuing to grow the top line and win customers is getting a bit tougher, particularly as affordability bites.

2. Were there any major surprises in this result that you think investors should be aware of?

There were no major surprises, it’s a reliable business. We’ve seen some more downgrades to the customer growth outlook and higher-than-expected expenses. The full-year guidance for claims and customer growth last August was updated in late calendar year 2023, and they’ve lowered a few aspects of that in the latest result.

3. Would you buy, hold or sell this stock on the back of this result?

Rating: BUY

We do hold Medibank, and the stock itself was trading quite strongly heading into the result. Given this was slightly behind consensus, with no big positive surprises, the stock sold off a bit on the back of the result. But given the longer-term story around the resilience of the company and some of the growth options, it’s still attractive.

4. What’s your outlook on this stock and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

The industry outlook is positive and Medibank is the most attractive company within that. 

We view it as one of the highest-quality companies in the market, in terms of the resilience of Medibank’s business model and dominant market position.

We think it’s very well run and currently has positive industry tailwinds, with consumers valuing private health insurance quite highly. The industry itself is doing a lot to improve claims.

The top-line growth at Medibank isn’t exciting but it is a company with very resilient operating margins. The longer-term story is that they’re also investing outside the insurance space, with some good opportunities for growth within this broader health services strategy.

In terms of risks, the main one is the period of improved claims we’ve seen post-COVID. A sudden reversal in that claims trend would be the key risk. Another one is that the government could hold back premium increases, but both of those are currently well-contained.

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating: 2

The insurance sector is defensive, and Medibank itself has longer-term growth options within the broader healthcare space. Most of these are under-appreciated, with the company trading on a reasonably high multiple, but this is justified.

• >> Read the announcement – Medibank Private 1H24 results
• >> View the presentation – Medibank Private 1H24 investor presentation

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