Treasure Chest: Downgrades Flow For Medibank Private

This story features MEDIBANK PRIVATE LIMITED. For more info SHARE ANALYSIS: MPL

Margins are declining and consumers are struggling with the rising cost of health insurance, leading to ratings downgrades for Medibank Private.

– Benefits paid exceeding revenues
– Premiums growing faster than wages
– Private health insurance a discretionary item
 

By Greg Peel

March quarter private health insurance statistics released by APRA suggested a troubling prognosis for the industry. An uptick in the quarter in benefits paid out led to benefit growth exceeding revenue growth for the first time since the June quarter 2014. The net industry margin on premium growth declined by -41 basis points.

Morgans is happy to acknowledge that one quarter’s stats do not imply a trend, thus the broker will be keeping a close eye on June quarter numbers before moving to downgrade forecasts for Medibank Private ((MPL)). Morgans already has a Sell-equivalent (Reduce) rating on the stock.

Credit Suisse, on the other hand, had Medibank on Neutral before the release of the March numbers, and has now downgraded to Underperform. The broker does not believe valuation is justifiable.

When Ord Minnett downgraded to Hold in the February result season, Medibank no longer attracted a Buy rating from any of the seven brokers in the FNArena database who cover the stock. Following Credit Suisse’s downgrade, Medibank drew four Hold and three Sell (or equivalent) ratings.

Not a database broker, but the latest to downgrade Medibank to Sell is Shaw & Partners.

Medibank is losing market share, Shaw notes. The insurer has not joined competitors on aggregator websites as it believes this would damage its brand name, preferring to stick with its own distribution network.

Medibank is addressing its problems by rejigging products, prices and benefits with a longer term customer in mind, as well as implementing a cost cutting program. But for Shaw, there is an overriding issue.

Private health insurance is simply becoming too expensive for the average consumer. With wages growing at an historically low rate of 1.9% per annum, insurance premiums are persistently rising at 4-5%. The percentage of household income taken up by health insurance is getting out of hand.

The same issue is prevalent in the housing market, Shaw notes. As house prices rise, households are stretching to ever greater percentages of their income put aside for mortgage repayments. And now mortgage rates are rising. In response, households are backing off on their discretionary spending. Retailers are feeling the pinch.

Healthcare as a whole is largely considered a consumer “staple”. We have to eat, we have to have a roof over our heads, and we are going to get sick. And old. But in a country that offers free universal health cover (to the extent that it does), private health insurance under the circumstances becomes a consumer discretionary item. Not quite a luxury, but something that will just have to take a backseat behind food and housing if it’s just too costly.

This is the basis of Shaw’s downgrade of Medibank to Sell. Australia’s discretionary retail sector is suffering from anaemic wage growth and the ever rising cost of housing. While there are no signs yet Amazon intends to get into private health insurance, the industry is now suffering from the same pressures more generally affecting the retail space.

Shaw notes Medibank has a strong brand and a solid balance sheet, but the broker cannot justify a forward price/earnings of 19x when the stock offers earnings risk and no top line growth.

Shaw has set a target price of $2.65. The consensus target among FNArena database brokers is $2.71.
 

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